ECO-202 Chapter 18
Wages in competitive labor markets
Adjusts to balance the supply, and demand for labor, which = the value of the marginal product of labor (VMPL).
Marginal product of labor (MPL)
An increase in the amount of output from an additional unit of labor.
Changes in supply or demand for labor
Caused by a change in the equilibrium wage, and a change in the value of the marginal product by the same amount.
Shift in the labor-demand curve (VMPL)
Caused by a change in the output price in the demand for labor, VMPL = MPL × P of output, or a technological change. Technological advance can raise MPL, which increases demand for labor. Labor-saving technology can reduce MPL, which decrease demand for labor. The supply of other factors also affect the marginal product of other factors.
Economics of immigration
Caused by a variety of labor markets for different kinds of workers. A wave of immigration (physicians) causes lower wages in those labor markets in which the new immigrants seek work (lower wages for physicians), as well as higher wages in other labor markets (physicians buy more apples; derived labor demand; higher wages for apple pickers).
Shift in the labor-supply curve
Caused by changes in tastes (ex. change in attitude toward work), changes in alternative opportunities (ex. opportunities available in other labor markets), and immigration (movement of workers from region to region or country to country).
A change in supply of a factor
Causes a change in the equilibrium factor price, and in earnings of the other factors.
An increase in supply
Causes a decrease in wage, which causes a lower marginal product of labor, and a lower value of marginal product of labor. An increase in supply also causes higher employment.
An increase in demand
Causes a higher wage, no change in marginal product of labor, a higher value of marginal product of labor, and higher employment.
Competitive, profit-maximizing firm
Hires workers up to the point where the value of the marginal product of labor = the wage.
People face trade-offs
In work vs leisure. The labor-supply curve reflects how workers' decisions about the labor-leisure trade-off respond to a change in opportunity cost of leisure.
Equilibrium
Purchase price- price a person pays to own that factor of production indefinitely. It depends on the current value of the marginal product, as well as the value of the marginal product expected to prevail in the future. Rental price- price a person pays to use that factor for a limited period of time.
Labor-demand curve
Reflects the value of marginal product of labor
Labor demand
The derived demand. Labor services = inputs into the production of other goods.
Assumptions for the firm
The firm is competitive in both markets for goods, and for labor. The price taker pays the market wage, and gets the market price for goods. Firms decide on the quantity of goods to sell, and the quantity of labor to hire. It is profit-maximizing.
Factors of Production
The inputs used to produce goods and services, such as labor, land, and capital. The demand for a factor of production is the derived demand from a firm's decision to supply a good in another market.
Diminishing marginal product
The marginal product of an input declines as the quantity of the input increases which explains the shape of the production function.
The value of the marginal product of labor (VMPL)
The marginal product of labor x the price of the output. The marginal revenue product is the additional revenue from hiring one additional unit of labor. It diminishes as the number of workers rises.
Linkages among the factors of production
The price paid to any factor of production = the value of the marginal product of that factor. The marginal product of any factor depends on the quantity of that factor that is available. When diminishing the marginal product, the factor in abundant supply causes a low marginal product, and a low price. A factor in scarce supply causes a high marginal product, and a high price.
Production function
The relationship between quantity of inputs used to make a good, and the quantity of output of that good. It becomes flatter as the quantity of input increases.
Rental price
The wage is the rental price of labor. The rental price of land, and capital is determined by supply and demand. Demand is a derived demand- it reflects the marginal productivity of the factor. Each factor's rental price is the value of marginal product for the factor.
Labor market
governed by supply and demand
The value-of-marginal-product curve
is the labor demand curve.
Capital
the equipment and structures used to produce goods and services
