TNøUT MARKET

Ganicalls, we hate a praduetion fnetion; thich sgs tht

pnoetion is fumetion o capitad (K) amd abeur <L).
Stusing on these input called Manginad Peoduetity Theory.
wwe kan divide a manhet in tno degmnts.
Marhet for fina eoduetion This mrketstuetue
Marhet for input Con lae bot
la
Compettive and
pongeety
wil
At 4iyt, ne sdey, demand oa inafeety comptative.
A

fim for One varetalele faetor wnder perfeet corpehition

9-f(KL).
Man T-TR-Te (Gnec, wwe are eomidining one ariable).
amont whi
FOs, >
Sree, e pra duehion fnetien is coeane.
‘bwt dimini hig.
’VMLw

Apoit-manami sâng enterunewr wih empley mity of )

avariable roduetae sewiee at
wntil the point is reaehed
which the talne o he magmal preodvet et the ingeut canal do
heinpu seviee
The vali othe magina duet of a vaiale prdustte
mutiplied by the makt priee ot
is eqnal t its maginalpduet
the emediy.
 VM

w;Labor luprly urve

NMe Demand foraboy Cus e

LE

Rel in ahange o eumeasr in"emylementalya.

P Tro Natiable fator

Mantt=
K,L TR-Te tK, L) - wL-rk- P.
FOS, Sos,
i.e. vMP= w

when apsdetiom proees iavels more than one Vaniaale poduetile

seuice, the Vaueof the marginal duetkuve of input is not it
denand cune.
The neaon hehind khis aetames is the varisus inputsinterdependnt
in the prro dnetitn proces, so fhat a ahange in the rie of one input lead
to ehnge in the rates o wtliution o the ethers.

Sutpoe, the manket wage srate is Ow,,the velue of the mginal

þoduet
o L mih e Laar oare employed. mage nitefalls to oa, so that
the pnfety elastin upply
 SLI

La

basteally ersplainable lay thefes,

This phenemena dan (outpt)
Qiytitution efeet, neome clfeet amd Profit manimising
theet.

For manket demand uv,

Maekt dd

Du
D
Le

In the eae of prodctie snices, the proees of addetin is

comideraoly more complied than Aiople horizont ummatin
f individulddeuis, akaue rwhen all frm epand orconiraet
analtmeewy, the manketpriee ot th aommedity ahans.?
Sinee, thr thins'arenet eanl, nhen aA firms empan

suerall employing ms.

for a giken
eominodity demand, eominodity prue must
al and when it does,the'inddividualdemandes or the':
 The thne cffest.

subytittion amd outpulfet

ef a chang in Saput prie.

F
For nimplity, we asme theNe are lus variable infputs eapita (w)
and labor(l). a, and &, are fasdustien 'temant.
,euilibrim ataty at poantA with inpts oL, and oK,.
Initially eontant.

he sope of ew isecet
Theneu nut priee slatis ds reptesented
Equilibm atainms at ponte, a higher soqutouth
cure EF.
Habor,
C n be deempgd into tias sopate
The meNement rom Ala
'etfat1'.
by mevement along the
The fints 'Suastitution tHfet, repesent
hae Contuet a
iLanant om Ato Ba To do this, we
iG´ that i parlel to EF'o represent.
tind ise coine
esdriting outt
neu input prie aio anmd tomgnt t 2, to. puu sehyttution
d. Themevementrim Ata 8 Asa
at the iitial dhe relatie riee
eut os he deerrease in
o Labor for apital as a
f the abor.
epree he otptetieet. when, ihe
The moement om Bto e
triee o. ubon

erpnditureon esewees Jiemay wnehanged.

pmbined if
 gumay, h
AeastAution effet sulling m A Nedveion
in Ahe wog rae cawisa subtitutien
substitutin of habor onpapitad. Thas
of haker
lome a hatt aber's marginad duet cnse to the aft
there is Les he capitad uith whih to wnarla.
The output attectictfeet genenaly rents in an nerneA
wyage ef bethi g . hs, ij etet done can shitthe labov's
nayind pderet e to the righ be there ts wnally more of

Point e indieata the opinl inputsatio fn the given empenditune

en eees,but it doemet hew he pogit manimisngamewnt ofinpuh
when h wage de fals, the manginad e of rsduetion is
edvee fore y lened of output ndes laaord a inerir tetor.
prefit mei mi in
The rnyinad cot Rue hits lo khe ighd, amd he
ompethie fam ineases. Thi a
sutt he pefety

proftmaainiising eeet nemally eadh to an

The inpb. Hemee,
ot o t , to an ineean in the wge of beth
Lurwe to fherigh.
wat dabor's manqinad prgdua
SutplyVariakle factor
Y: înome.
A: Lesure.

Y w(T-) T T.Non o r ineome

The budget emtrainti , weT-). abew ineome
: laberefee
T

I(T-L)
 nhet u y eunwe ora faetov ingut iis
The mnkeet wually upnan
heease the mgin ent ot pnodycing heqod is tye
Thit hatpens
inerreaing.
when the inpti Labor, howeverpeople atter tham inms ae mahiny
ather
supry eeinigns. n thii Case, uility maimisation by worhes
than oit maimizlign by rm detemimes s t
eets.
we wse the analyii o income an usstihution

-> eisue

Barically, the mge vate meanures the ue fht the morhes a s

en Leikure hm, hea is/her mage meawsthe ament of money
that the worken gises up ta enyey eLute.
Ahe mage rate d e e s , the prie of lu suee also deen
deeeany.
ate Leisune
Thoe is a subsitutionC t , beeaue the laer prie of
Ll suLe.
tise demotivates wsrkes to substitwe buonkfor dereses
beease, e daer mag rate
An tmeone ellet oews
wnea's tomer.

E ’E: Lneomm Effeet. Tuno cffeh mork in-oroteAiuetion

Subshitetion feet
 higher naome, the wnker eanby
mag rate, the priee of inre
ne ywhich is eicure. ath ine
Pf maNe leite was ahn, t is beeawethe ineeme
ees. fenerhours.
eat has eneowaged the werhen o mov
eEleit eutmigh the Substition Efeet, the
when neeme
reult is Backuad Bending Auppy Aurve.

Coidr, T=0; Sahuwehm,

foint of Satuvalion

when, the unagenate ineSes, he hous of worR pee

deeseres as individuay
heeasinihially evegtuay
to enjoy moe leiuwe to work en
heo
The baehwad bem ding pondin of the haber ppy
A e aihes hen he nesme Efeet of the gher wage
htitutn
ere leie) a^s Leaku thn the
(whih emeeags