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Chapter 18-The Markets for the Factors of Production.pptx
1. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
PowerPoint Slides prepared by:
V. Andreea CHIRITESCU
Eastern Illinois University
1
Principles of Economics, Ninth Edition
N. Gregory Mankiw
2. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Chapter 18
The Markets for the Factors of Production
2
3. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Factors of Production
⢠Factors of production
âInputs used to produce goods and
services
âLabor, land, capital
⢠Demand for a factor of production
âDerived demand
⢠From firmâs decision to supply a good in
another market
3
4. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
The Demand for Labor, Part 1
⢠Labor market
âGoverned by supply and demand
⢠Labor demand
âDerived demand
âLabor services = inputs into the production
of other goods
4
5. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Figure 1 The Versatility of Supply and Demand
The basic tools of supply and demand apply to goods and to labor services.
Panel (a) shows how the supply and demand for apples determine the price of apples.
Panel (b) shows how the supply and demand for apple pickers determine the wage of apple
pickers.
5
6. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
The Demand for Labor, Part 2
⢠Assumptions for the firm
âFirm is competitive in both markets
⢠For goods and for labor
⢠Price taker
â Pay the market wage
â Get the market price for goods
⢠Decide
â Quantity of goods to sell
â Quantity of labor to hire
âFirm is profit-maximizing
6
7. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
The Demand for Labor, Part 3
⢠Production function
âRelationship between the quantity of
inputs used to make a good
âAnd the quantity of output of that good
âBecomes flatter as the quantity of input
increases
7
8. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
The Demand for Labor, Part 4
⢠Marginal product of labor (MPL)
âIncrease in the amount of output
âFrom an additional unit of labor
⢠Diminishing marginal product
âThe marginal product of an input declines
âAs the quantity of the input increases
âExplains the shape of the production
function
8
9. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Table 1 How the Competitive Firm Decides How
Much Labor to Hire
(1)
Labor
L
(2)
Output
Q
(3)
Marginal
Product of
Labor
MPL = ÎQ/ÎL
(4)
Value of the
Marginal Product
of Labor
VMPL= P Ă MPL
(5)
Wage
W
(6)
Marginal Profit
ÎProfit = VMPL-W
0 workers 0 bushels
1 100 100 bushels $1,000 $500 $500
2 180 80 800 500 300
3 240 60 600 500 100
4 280 40 400 500 -100
5 300 20 200 500 -300
9
10. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Figure 2 The Production Function
10
11. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
The Demand for Labor, Part 5
⢠The value of the marginal product of labor
(VMPL)
âMarginal product of labor times the price
of the output
âMarginal revenue product
⢠Additional revenue from hiring one additional
unit of labor
âDiminishes as the number of workers rises
11
12. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Figure 3 The Value of the Marginal Product of Labor
12
13. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
The Demand for Labor, Part 6
⢠Competitive, profit-maximizing firm
âHires workers up to the point where the
value of the marginal product of labor =
wage
⢠The value-of-marginal-product curve
âIs the labor-demand curve
⢠Labor-demand curve
âReflects the value of marginal product of
labor
13
14. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
The Demand for Labor, Part 7
⢠Shift in the labor-demand curve (VMPL)
âChange in the output price
⢠Demand for labor: VMPL = MPL à P of output
âTechnological change
⢠Technological advance can raise MPL:
increase demand for labor
⢠Labor-saving technology can reduce MPL:
decrease demand for labor
âSupply of other factors
⢠Affect marginal product of other factor
14
15. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
The Supply of Labor, Part 1
⢠People face trade-offs
⢠Trade-off
âWork versus leisure
⢠Labor-supply curve
âReflects how workersâ
decisions about the labor-
leisure trade-off
âRespond to a change in
opportunity cost of leisure
âI really didnât enjoy
working five days a week,
fifty weeks a year for forty
years, but I needed the
money.â
15
16. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
The Supply of Labor, Part 2
⢠Shift in the labor-supply curve
âChanges in tastes
⢠Change in attitude toward work
âChanges in alternative opportunities
⢠Opportunities available in other labor markets
âImmigration
⢠Movement of workers from region to region or
country to country
16
17. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
ASK THE EXPERTS, Part 1
Immigration
âThe average US citizen would be better off if a
larger number of highly educated foreign
workers were legally allowed to immigrate to
the US each year.â
17
18. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
ASK THE EXPERTS, Part 2
Immigration
âThe average US citizen would be better off if a
larger number of low-skilled foreign workers
were legally allowed to enter the US each
year.â
18
19. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
ASK THE EXPERTS, Part 3
Immigration
âUnless they were compensated by others,
many low-skilled American workers would be
substantially worse off if a larger number of
low-skilled foreign workers were legally
allowed to enter the US each year.â
19
20. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Equilibrium in the Labor Market, Part 1
⢠Wages in competitive labor markets
âAdjusts to balance the supply & demand
for labor
âEquals the value of the marginal product
of labor (VMPL)
⢠Changes in supply or demand for labor
âChange the equilibrium wage
âChange the value of the marginal product
by the same amount
20
21. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Figure 4 Equilibrium in a Labor Market
21
22. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Equilibrium in the Labor Market, Part 2
⢠Increase in supply
âDecrease in wage
⢠Lower marginal product of labor
⢠Lower value of marginal product of labor
âHigher employment
22
23. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Figure 5 A Shift in Labor Supply
23
24. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Equilibrium in the Labor Market, Part 3
⢠Economics of immigration
âVariety of labor markets for different kinds
of workers
âA wave of immigration (physicians)
⢠Lower wages in those labor markets in which
the new immigrants seek work (lower wages
for physicians)
⢠Higher wages in other labor markets
(physicians buy more apples; derived labor
demand; higher wages for apple pickers)
24
25. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Equilibrium in the Labor Market, Part 4
⢠Increase in demand
âHigher wage
⢠No change in marginal product of labor
⢠Higher value of marginal product of labor
âHigher employment
25
26. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Figure 6 A Shift in Labor Demand
26
27. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Productivity and Wages, Part 1
⢠Standard of living
âDepends on our ability to produce goods
and services
⢠Wages = productivity
âAs measured by the value of the marginal
product of labor
âHighly productive workers are highly paid
âLess productive workers are less highly
paid
27
28. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Productivity and Wages, Part 2
⢠Workers today
âAre better off than workers in previous
generations
⢠Productivity and real wages growth
â1960 to 2017
⢠Productivity (output per hour of work) grew
about 2.0% per year
⢠Real wages (wages adjusted for inflation)
grew at 1.8% per year
⢠Productivity and real wages double every 35
years
28
29. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Productivity and Wages, Part 3
⢠Productivity and real wages growth
â1973 â 1995: significant slowdown in
productivity growth (from 2.7 to 1.4%)
⢠Slowdown in real wage growth: from 2.7 to
1.2%
â2010 â 2017: productivity growth = 0.7%
per year
⢠Real wages grew by 0.8% per year
29
30. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Figure 7 Growth in Productivity and Real Wages
30
31. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Land and Capital, Part 1
⢠Capital
â Equipment and structures used to produce
goods and services
⢠Equilibrium
â Purchase price
⢠Price a person pays to own that factor of production
indefinitely
â Rental price
⢠Price a person pays to use that factor for a limited
period of time
31
32. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Equilibrium: Land and Capital, Part 1
⢠Wage
âRental price of labor
⢠Rental price of land and capital
âDetermined by supply and demand
âDemand is a derived demand
⢠Reflects marginal productivity of the factor
⢠Each factorâs rental price
âValue of marginal product for the factor
32
33. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Figure 8 The Markets for Land and Capital
33
34. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Equilibrium: Land and Capital, Part 2
⢠Equilibrium purchase price depends on
âCurrent value of the marginal product
âValue of the marginal product expected to
prevail in the future
34
35. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Land and Capital, Part 2
⢠Linkages among the factors of production
âPrice paid to any factor of production
= Value of the marginal product of that factor
âMarginal product of any factor depends on
⢠Quantity of that factor that is available
⢠Diminishing marginal product
âFactor in abundant supply
⢠Low marginal product
⢠Low price
35
36. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Land and Capital, Part 3
⢠Diminishing marginal product
âFactor in scarce supply
⢠High marginal product
⢠High price
⢠Change in supply of a factor
âChange in equilibrium factor price
âChange in earnings of the other factors
36
37. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
The Economics of the Black Death, Part 1
⢠14th century Europe,
Black Death (bubonic
plague)
âWiped out about one-
third of the population
within a few years
âGrisly natural
experiment to test the
theory of factor
markets
âWorkers who survived the
plague were lucky in more ways
than one.â
37
38. N. Gregory Mankiw, Principles of Economics, 9th Edition Š 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
The Economics of the Black Death, Part 2
⢠Effects of the Black Death on survivors
âReduced population: Smaller supply of
workers
âMarginal product of labor rises: Higher
wages
⢠Wages doubled
⢠Economic prosperity for peasant classes
âMarginal product of land fell: Lower rents
⢠Rents declined 50% or more
⢠Reduced income for the landed classes
38
Editor's Notes
N. Gregory Mankiw Principles Of EconomicsNinth Edition