EC120 Chapter Notes - Chapter 18: Marginal Product, Demand Curve, Opportunity Cost
11/25/15
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EC120 – CHAPTER 18: THE MARKETS FOR THE FACTORS OF PRODUCTION
• FACTORS OF PRODUCTION: The inputs used to produce goods and services
• Labour, Land and Capital are the three main factors
• Demand for a factor of production is a derived demand
• DERIVED DEMAND: A firm’s demand for a factor of production is derived
from its decision to supply a good in another market
o E.g. Demand of gas station attendants is tied to the supply of gas
THE COMPETITIVE, PROFIT-MAXIMIZING FIRM
• Due to the competitive nature of the market, a firm does not have control
over price it receives, or the wage it pays to labourers
• Assume that the firms main interest is profit, and nothing else
THE PRODUCTION FUNCTION AND THE MARGINAL PRODUCT OF LABOUR
• PRODUCTION FUNCTION: The relationship between the quantity of inputs
used to make a good and the quantity of output of that good
• MARGINAL PRODUCT OF LABOUR: The increase in the amount of output
from an additional unit of labour
• DIMINISHING MARGINAL PRODUCT: The property whereby the marginal
product of an input declines as the quantity of the input increases
THE VALUE OF THE MARGINAL PRODUCT AND THE DEMAND FOR LABOUR
• VALUE OF THE MARGINAL PRODUCT (VMP): The marginal product of an
input times the price of the output
• A competitive, profit-maximizing firm hires workers up to the point where
the value of the marginal product equals the wage
• The value-of-marginal-product curve is the labour demand curve for a
competitive, profit-maximizing firm
WHAT CAUSES THE LABOUR DEMAND CURVE TO SHIFT?
• The Output Price – E.g. An increase in the price of apples raises the value of
the marginal product for each person who picks apples, increases labour
demand
• Technological Change – Tech advance typically raises marginal product of
labour, which increases demand
• The Supply of Other Factors – E.g. A fall in the supply of ladders will reduce
marginal product of apple pickers, reducing demand
TRADEOFF BETWEEN WORK AND LEISURE
• Labour supply curve reflects how workers’ decisions about the labour-
leisure tradeoff respond to a change in opportunity cost
• Upward sloping supply = Increase in wages means increase in quantity of
labour supplied
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EC120 Full Course Notes
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Document Summary
Demand of gas station attendants is tied to the supply of gas from its decision to supply a good in another market. What causes the labour demand curve to shift? the marginal product for each person who picks apples, increases labour demand: the output price e. g. An increase in the price of apples raises the value of: technological change tech advance typically raises marginal product of, the supply of other factors e. g. A fall in the supply of ladders will reduce: labour supply curve reflects how workers" decisions about the labour, upward sloping supply = increase in wages means increase in quantity of. Tradeoff between work and leisure leisure tradeoff respond to a change in opportunity cost labour, which increases demand marginal product of apple pickers, reducing demand labour supplied. What causes the labour supply curve to shift: change in tastes e. g. Women now entering the workforce: changes in alternative opportunities e. g.
