Input Demand: The Labor and Land Markets

Demand for Inputs: A Derived Demand ,[object Object],[object Object]

Inputs: Complementary and Substitutable ,[object Object],[object Object]

Diminishing Returns ,[object Object],[object Object]

Marginal Revenue Product ,[object Object],[object Object]

Marginal Revenue Product Per Hour of Labor in Sandwich Production (One Grill) 5.00 .50 10 35 3 2.50 .50 5 40 4 1.00 .50 2 42 5 a The “price” is essentially profit per sandwich; see discussion in text. 0 .50 0 42 6 7.50 .50 15 25 2 5.00 $ .50 $ 10 10 1    0 0 (5) MARGINAL REVENUE PRODUCT ( MP L X P X ) (PER HOUR) (4) PRICE ( P X ) (VALUE ADDED PER SANDWICH) a (3) MARGINAL PRODUCT OF LABOR ( MP L ) (SANDWICHES PER HOUR) (2) TOTAL PRODUCT (SANDWICHES PER HOUR) (1) TOTAL LABOR UNITS (EMPLOYEES)

Marginal Revenue Product Per Hour of Labor in Sandwich Production (One Grill) ,[object Object],[object Object],MRP L = P X  MP L

A Firm Using One Variable Factor of Production: Labor ,[object Object],[object Object]

Marginal Revenue Product and Factor Demand for a Firm Using One Variable Input (Labor) ,[object Object],W * =MRP L = 10

Short-Run Demand Curve for a Factor of Production ,[object Object]

Comparing Marginal Revenue and Marginal Cost to Maximize Profits ,[object Object],[object Object]

The Two Profit-Maximizing Conditions ,[object Object]

A Firm Employing Two Variable Factors of Production ,[object Object],[object Object]

Substitution and Output Effects of a Change in Factor Price ,[object Object],[object Object]

Substitution and Output Effects of a Change in Factor Price ,[object Object],Response of a Firm to an Increasing Wage Rate $23 $13 10 3 B (labor intensive) $20 $15 5 10 A (capital intensive) L K UNIT COST IF P L = $2 P K = $1 ( P L x L ) + ( P K x K ) UNIT COST IF P L = $1 P K = $1 ( P L x L ) + ( P K x K ) INPUT REQUIREMENTS PER UNIT OF OUTPUT TECHNOLOGY

Substitution and Output Effects of a Change in Factor Price ,[object Object],The Substitution Effect of an Increase in Wages on a Firm Producing 100 Units of Output TO PRODUCE 100 UNITS OF OUTPUT $2,000 500 1,000 When P L = $2, P K = $1, firm uses technology A $1,300 1,000 300 When P L = $1, P K = $1, firm uses technology B TOTAL VARIABLE COST TOTAL LABOR DEMANDED TOTAL CAPITAL DEMANDED

Many Labor Markets ,[object Object],[object Object]

Demand Determined Price ,[object Object],[object Object],[object Object]

Land in a Given Use Versus Land of a Given Quality ,[object Object],[object Object]

Rent and the Value of Output Produced on Land ,[object Object],[object Object],MRP A = P A

The Firm’s Profit-Maximization Condition in Input Markets ,[object Object],P L = MRP L = ( MP L X P X ) P K = MRP K = ( MP K X P X ) P A = MRP A = ( MP A X P X ) where L is labor, K is capital, A is land (acres), X is output, and P X is the price of that output.

The Firm’s Profit-Maximization Condition in Input Markets ,[object Object],[object Object]

Input Demand Curves ,[object Object]

Impact of Capital Accumulation on Factor Demand ,[object Object]

Impact of Technological Change ,[object Object],[object Object]

Input Demand: The Labor and Land Markets

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Input Demand: The Labor and Land Markets