there are three key factors of production and each of them has different names for the payments

businesses make for those resources for

land the payment is called rent for labor the payment is called wages for physical capital we call the payments
interest.

production function shows us the relationship between the quantity of labor a business hires and the amount of output those workers can
produce

three phases of the law of diminishing marginal returns as you hire more workers you get increasing marginal product then decreasing
marginal product we call that diminishing marginal returns and then finally negative marginal product

take that concept and apply it to determine how many workers a business would like to hire in order to figure that out we have to calculate
what's called the marginal revenue product

marginal revenue product is the marginal revenue times the marginal product of those workers

marginal revenue is going to be equal to the price

now a firm's demand for labor is equal to the marginal revenue product of those workers that's because the most a firm would be willing to
pay for a worker is equal to the money that worker brings in by hiring them

so if the price of workers was 50 worth of wage how many workers would this firm be willing to hire well that third worker brings in 100 worth
of marginal revenue product if that worker is paid 50 hiring that worker increases profit by 50 so that firm should definitely hire that worker
the next worker brings in 70 worth of marginal revenue product that still increases profit so they should be hired as far as that fifth worker
goes marginal revenue product is only 40 that is less than the wage and that worker would decrease profit if they were hired based on this
chart the profit maximizing number of workers is four.

Market Demand

the market demand for labor is downward sloping and shows an inverse relationship between the wage and the number of workers hired
when the wage falls the number of workers hired increases. it's a downward sloping demand curve. that demand curve comes from the sum
of each firm's marginal revenue product

NOTE: businesses are the demanders so far they've been the suppliers now they're the ones that are demanding labor here

market supply curve for labor. we have an upward sloping supply

curve for labor just like most other
3:51
supply curves you've seen before in this
3:53
class
3:54
when the wage rises the number of
3:56
workers willing to work
3:57
also increases there's a direct
3:59
relationship between the wage
4:01
and the quantity supplied. in the past
4:03
consumers within households were the
4:05
ones demanding products.
4:06
now households are the suppliers of labor
changes within the factor markets
the labor demand curve is actually a derived demand it comes from the product price, the product demand and the productivity of the
workers that are making the product. if any of those things change it will change the demand curve and shift it

4:34 insert graph

here we have an increase in the demand all of these changes actually move the demand curve because they all impact the marginal revenue
product of these workers. any of those things increasing the marginal revenue product of the workers will increase the demand likewise if
any of those things decrease the marginal revenue product of the workers it will decrease the demand for those workers

the supply of labor can also shift of course when anything that would impact the number of workers available at any given price; the number
of workers there are, the availability of those workers, the population, the age, the value of leisure time and countless other things can impact
the supply of labor

an increase in the supply of labor it's going to be a rightward shift indicating an increase

equilibrium comes from the interaction between supply and demand that's what gives us our equilibrium wage it's where the two
5:34
curves intersect
5:36
and that also gives us our equilibrium
5:38
quantity of workers hired
5:40
this is just like the product markets
5:43
we've seen before in the past
5:44
except that the suppliers are actually
5:47
from households
5:48
and the demanders are actually
5:51
businesses
5:52
if we see an increase in the demand for
5:53
labor within the market we should expect
5:56
an
5:56
increase in the wage and an increase in
5:59
the equilibrium quantity
6:00
just like you would have seen in product
6:02
market changes

Firms
6:03
next we're going to talk about firms
6:05
within these markets first we're going
6:06
to talk about firms within perfectly
6:08
competitive factor markets
6:10
here there are many many buyers of labor
6:12
within this market
6:14
each individual firm must compete to buy
6:16
the workers they need to produce the
6:18
products they are trying to sell
6:19
here's our market here we have our
6:21
downward sloping demand upward sloping
6:22
supply and
6:23
it establishes our equilibrium wage
6:26
and equilibrium quantity within the
6:28
market these firms are wage
6:31
takers which means that they have no
6:33
influence on price
6:34
there are so many businesses competing
6:36
for labor within this market
6:38
the market sets the wage and that wage
6:41
is going to be the cost of hiring one
6:44
more worker
6:45
we call that the marginal resource cost
6:47
marginal resource cost is the amount of
6:49
money a business has to pay
6:51
to hire one more worker thanks to so
6:53
many firms competing within the market
6:54
and firms being wage takers as a result
6:57
each
6:58
firm's marginal resource cost will be
7:00
equal to
 7:01
the market wage so we're going to take
7:03
that market wage and take it all the way
7:05
over to the firm graph
7:06
that market wage becomes the firm's
7:09
supply curve
7:10
they can hire as many workers as they
7:12
want at the market wage
7:14
that is also equal to our marginal
7:15
resource cost for this firm
7:18
next we're going to add in the firm's
7:19
demand curve it looks like a marginal
7:21
product curve that you've already seen
7:23
but remember we're taking the marginal
7:25
product and multiplying it by the
7:26
marginal revenue for those workers
7:28
that gives us an upward sloping portion
7:30
when we have increasing marginal returns
7:33
and then thanks to diminishing marginal
7:35
returns it eventually downward slopes
7:37
now most of the time when i draw this i
7:39
leave off that upward sloping portion
7:41
because my assumption is that firms
7:43
would always hire those workers
7:45
if they're operating at all so where is
7:47
the profit maximizing number of workers
7:49
this firm should hire
7:51
well at low quantities we see that the
7:53
marginal revenue product that's the
7:54
benefit of hiring workers
7:56
is greater than the marginal resource
7:59
cost or the marginal cost of hiring
8:00
those workers
8:01
so it pays to hire more workers at
8:04
higher quantities we see that the
8:06
marginal resource cost
8:07
the marginal cost of hiring workers is
8:10
greater than the marginal revenue
8:12
product or the marginal benefit for
8:13
hiring workers here
8:15
it pays to hire less the profit
8:17
maximizing number of workers
8:19
is found where the marginal revenue
8:22
product
8:22
equals the marginal resource cost it's
8:25
right there at the intersection between
8:27
those two curves
8:28
if there are changes within the market
8:30
it's going to move the firm's marginal
8:32
resource cost
8:33
here we have an increase in demand
8:34
that's going to
8:36
increase that equilibrium wage and
8:38
increase the equilibrium quantity within
8:40
the market
8:40
that increase in the wage is going to
8:42
shift the marginal resource cost and
8:44
supply of labor
 8:45
up for the firm that gives us a lower
8:48
profit maximizing quantity number of
8:50
workers this firm will hire
8:52
you will notice that even though this
8:54
firm is hiring fewer workers
8:56
the marginal revenue product of the last
8:58
worker hired
8:59
is now larger than it was before because
9:02
we are at a higher point
9:03
on that marginal revenue product curve
9:06
at the new
9:07
profit maximizing quantity of labor
9:09
hired you can also have changes that
9:11
impact just the firm and not the market
9:13
as a whole
9:13
here we have an increase in the marginal
9:15
revenue product for
9:16
just this firm that could come from an
9:18
increase in technology or productivity
9:20
of this firm's workers if that happens
9:23
this firm will hire
9:24
a greater number of workers but the
9:26
marginal revenue product of the last
9:28
worker hired
Monopsony
9:29
didn't change there's only one other
9:30
factor market that you need to know for
9:32
this unit
9:33
and that is called monopsony it's sort
 9:35
of like a monopoly
9:36
but with a monopoly there's only one
9:38
seller of a product
9:39
with monopsony there's only one buyer in
9:42
this case of a resource
9:44
labor there's only one firm the firm is
9:47
going to be the market and the market is
9:48
going to be the firm
9:49
that means the firm's supply curve is
9:52
the labor supply curve it's
9:54
upward sloping just like the market
9:55
supply curve was before
9:57
at low wages a small number of workers
10:00
will be willing to work
10:01
if the firm wants to hire more workers
10:03
it's going to have to raise the wage
10:05
in order to incentivize those workers to
10:07
give up leisure time
10:08
for a monopsony there's an interesting
10:10
relationship between the wage
10:12
and the marginal resource cost since
10:14
this firm must
10:15
increase wages to hire more workers it
10:18
changes the connection between the
10:20
supply of labor
10:21
and the marginal resource cost for the
10:23
firm
10:24
here at one worker the wage is going to
10:27
be
10:27
ten dollars that gives us a marginal
10:30
resource
10:31
cost the change in total resource cost
10:34
of ten dollars it's equal to the wage at
10:36
the moment because it's the first worker
10:38
that's been hired
10:39
if this firm hires a second worker it
10:41
must increase the wage to eleven dollars
10:43
but it doesn't just pay that second
10:46
worker 11
10:47
it also pays the first worker 11
10:50
that means the marginal resource cost or
10:53
the change in the total resource cost
10:55
is 12 it is more than the wage
10:59
if you look all the way down that chart
11:01
the marginal resource cost is going to
11:03
be greater than the wage
11:05
all the way down if we graph this out
11:07
those first two columns
11:09
are the supply of labor for the market
11:12
the marginal resource cost for this firm
11:15
is those two columns and if we graph it
11:18
out it tells us that the marginal
11:20
resource cost
11:21
is greater than the supply of labor
11:24
here's what it looks like on the graph
11:25
our supply of labor is upward sloping
11:28
because that is the market supply curve
 11:30
and the marginal resource cost is above
11:33
the supply curve there
11:34
let's go ahead and add in our firm's
11:36
demand curve it is the marginal revenue
11:38
product for that firm
11:40
and just like a perfectly competitive
11:41
factor market firm
11:43
this firm will profit maximize if it
11:45
hires the quantity of labor where the
11:47
marginal revenue product
11:48
equals the marginal resource cost let's
11:50
find that point and drop down
11:53
that is the quantity of labor this
11:55
monopsony is going to hire
11:57
the wage though comes from not that
12:00
intersection
12:01
but from the supply curve below because
12:04
the supply curve
12:05
indicates the wage required to hire that
12:07
number of workers
12:09
next we're going to compare this
12:10
monopsony to a perfectly competitive
12:12
market
12:13
remember perfectly competitive markets
12:15
will pay the
12:16
equilibrium wage where the supply and
12:18
demand intersect
12:19
and it will higher the number of workers
12:21
where the supply and demand intersect
12:23
in order to turn this market into a
12:24
monopsony just put the marginal resource
12:27
cost
12:27
above the supply there mark the profit
12:30
maximizing quantity of workers
12:32
and the wage that this firm will hire
12:35
that shows us
12:36
that a monopsony pays lower wages
12:39
and hires fewer workers than a perfectly
12:42
competitive market would
12:44
as a result monopsonies are not
12:45
allocatively efficient
12:47
and in fact we've got dead weight loss
12:49
right there

Least Cost Combination

12:50
the last thing we're going to talk about
12:52
is least cost combinations of resources
12:54
that can be used in the production
12:56
of different goods this is just like
12:59
utility maximizing combinations that you
13:01
learned
13:02
back in unit 1. let's say a firm has two
13:04
primary resources that it uses in the
13:06
production of its goods
13:08
labor and capital in order to find the
13:11
least cost combination
13:12
of these resources first you need to
13:14
take the marginal product
13:16
of that resource and divide it by the
13:18
price of the resource for labor
13:20
the marginal product is 30. the price of
13:23
labor is 15
13:25
for capital the marginal product is 100
13:28
units of output
13:29
while the price of capital is 25 dollars
13:33
when you divide you get two units of
13:35
output per dollar spent on labor
13:37
for capital you have four units of
13:39
output per dollar spent
13:41
which one should we employ more of well
13:44
the profit maximizing combination is
13:46
found where the marginal product of
13:48
labor divided by the price of labor
13:50
equals the marginal product of capital
13:52
divided by the price of capital
13:54
since they aren't equal you want more of
13:57
the one with the higher
13:59
marginal product per dollar capital and
14:02
less of the one with the lower marginal
14:04
product per dollar
14:06
labor we got through it