Long Run and Short Run Costs

Chapter
10
Input Demand: The Labor
and Land Markets
Prepared by:
Fernando & Yvonn Quijano
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
10
CHAPTER 10: Input Demand: The Labor
Input Demand: The Labor

and Land Markets
and Land Markets
Chapter Outline
Input Markets: Basic Concepts

Demand for Inputs: A Derived Demand
Inputs: Complementary and Substitutable
Diminishing Returns
Marginal Revenue Product
Labor Markets
A Firm Using Only One Variable Factor of
Production: Labor
A Firm Employing Two Variable Factors of
Production in the Short and Long Run
Many Labor Markets
Land Markets
Rent and the Value of Output Produced on Land
The Firms Profit-Maximization Condition in
Input Markets
Input Demand Curves
Shifts in Factor Demand Curves
Resource Allocation and the Mix of Output
in Competitive Markets
The Distribution of Income
Looking Ahead
INPUT DEMAND: THE LABOR
AND LAND MARKETS
and Land Markets
FIGURE 10.1 Firm and Household Decisions
INPUT MARKETS: BASIC CONCEPTS
DEMAND FOR INPUTS: A DERIVED DEMAND

and Land Markets
derived demand The demand for

resources (inputs) that is dependent on the
demand for the outputs those resources
can be used to produce.
productivity of an input The amount of

output produced per unit of that input.
Inputs are demanded by a firm if and only if households demand the good or service
produced by that firm.
INPUTS: COMPLEMENTARY AND SUBSTITUTABLE
Inputs can be complementary or substitutable.

and Land Markets
DIMINISHING RETURNS
marginal product of labor (MPL) The

additional output produced by one
additional unit of labor.
TABLE 10.1 Marginal Revenue Product per Hour of Labor in Sandwich Production (One Grill)
(3) (5)
and Land Markets
(2) MARGINAL MARGINAL

(1) TOTAL PRODUCT OF (4) REVENUE
TOTAL LABOR PRODUCT LABOR (MPL) PRICE (PX) (VALUE PRODUCT
UNITS (SANDWICHES PER (SANDWICHES ADDED PER (MPL X PX)
(EMPLOYEES) HOUR) PER HOUR) SANDWICH)a (PER HOUR)
0 0
1 10 10 $ .50 $ 5.00
2 25 15 .50 7.50
3 35 10 .50 5.00
4 40 5 .50 2.50
5 42 2 .50 1.00
6 42 0 .50 0
The price is essentially profit per sandwich; see discussion in text.

a
MARGINAL REVENUE PRODUCT

and Land Markets
marginal revenue product (MRP) The

additional revenue a firm earns by
employing one additional unit of input,
ceteris paribus.
MRPL = MPL x PX
and Land Markets
FIGURE 10.2 Deriving a Marginal

Revenue Product Curve
from Marginal Product
LABOR MARKETS
A FIRM USING ONLY ONE VARIABLE

FACTOR OF PRODUCTION: LABOR
and Land Markets
A profit-maximizing firm will add inputsin the case

of labor, it will hire workersas long as the marginal
revenue product of that input exceeds the market
price of that inputin the case of labor, the wage.
LABOR MARKETS
and Land Markets
FIGURE 10.3 Marginal Revenue Product and Factor Demand for a Firm
Using One Variable Input (Labor)
When a firm uses only one variable factor of production, that factors marginal revenue
product curve is the firms demand curve for that factor in the short run.
LABOR MARKETS
Comparing Marginal Revenue and Marginal Cost to

Maximize Profits
and Land Markets
FIGURE 10.4 The Two Profit-Maximizing Conditions Are

Simply Two Views of the Same Choice Process
LABOR MARKETS
and Land Markets
FIGURE 10.5 The Trade-Off Facing Firms
Assuming that labor is the only variable input, if society values a good more than it costs
firms to hire the workers to produce that good, the good will be produced. In general, the
same logic also holds for more than one input. Firms weigh the value of outputs as
reflected in output price against the value of inputs as reflected in marginal costs.
LABOR MARKETS
A FIRM EMPLOYING TWO VARIABLE FACTORS

OF PRODUCTION IN THE SHORT AND LONG RUN
and Land Markets
In firms employing just one variable factor of production,

a change in the price of that factor affects only the
demand for the factor itself. When more than one factor
can vary, however, we must consider the impact of a
change in one factor price on the demand for other
factors as well.
LABOR MARKETS
Substitution and Output Effects of a Change in

Factor Price
and Land Markets
TABLE 10.2 Response of a Firm to an Increasing Wage Rate
UNIT COST IF UNIT COST IF

INPUT REQUIREMENTS PL = $1 PL = $2
PER UNIT OF OUTPUT PK = $1 PK = $1
TECHNOLOGY K L (PL x L) + (PK x K) (PL x L) + (PK x K)
A (capital intensive) 10 5 $15 $20

B (labor intensive) 3 10 $13 $23
LABOR MARKETS
TABLE 10.3 The Substitution Effect of an Increase in Wages on a Firm Producing 100
and Land Markets
Units of Output
TO PRODUCE 100 UNITS OF OUTPUT
TOTAL TOTAL TOTAL
CAPITAL LABOR VARIABLE
DEMANDED DEMANDED COST
When PL = $1, PK = $1,

firm uses technology B 300 1,000 $1,300
When PL = $2, PK = $1,

1,000 500 $2,000
firm uses technology A
LABOR MARKETS
factor substitution effect The tendency

of firms to substitute away from a factor
and Land Markets
whose price has risen and toward a factor

whose price has fallen.
output effect of a factor price increase

(decrease) When a firm decreases
(increases) its output in response to a
factor price increase (decrease), this
decreases (increases) its demand for all
factors.
LABOR MARKETS
MANY LABOR MARKETS

and Land Markets
If labor markets are competitive, the wages in those markets are

determined by the interaction of supply and demand. As we have
seen, firms will hire workers only as long as the value of their product
exceeds the relevant market wage. This is true in all competitive labor
markets.
LAND MARKETS
demand determined price The price of a

good that is in fixed supply; it is determined
and Land Markets
exclusively by what firms and households

are willing to pay for the good.
pure rent The return to any factor of

production that is in fixed supply.
LAND MARKETS
and Land Markets
FIGURE 10.6 The Rent on Land Is Demand Determined
The supply of land of a given quality at a given location is truly fixed in supply. Its value
is determined exclusively by the amount that the highest bidder is willing to pay for it.
Because land cannot be reproduced, supply is perfectly inelastic.
LAND MARKETS
RENT AND THE VALUE OF OUTPUT PRODUCED ON

LAND
and Land Markets
The demand for land is a derived demand. Agricultural or

even desert land will be developed when there is a
demand for housing because land is a key input used in
the production of housing.
A firm will pay for and use land as long as the revenue earned from selling the product
produced on that land is sufficient to cover the price of the land. Stated in equation form,
the firm will use land up to the point at which MRPA= PA, where A is land (acres).
THE FIRMS PROFIT-MAXIMIZATION CONDITION
IN INPUT MARKETS
Profit-maximizing condition for the perfectly

and Land Markets
competitive firm is
PL = MRPL = (MPL x PX)

PK = MRPK = (MPK x PX)
PA = MRPA = (MPA x PX)
where L is labor, K is capital, A is land (acres), X is

output, and PX is the price of that output.
INPUT DEMAND CURVES
SHIFTS IN FACTOR DEMAND CURVES

The Demand for Outputs
and Land Markets
If product demand increases, product price will rise and

marginal revenue product (factor demand) will increasethe
MRP curve will shift to the right. If product demand declines,
product price will fall and marginal revenue product (factor
demand) will decreasethe MRP curve will shift to the left.
The Quantity of Complementary and

Substitutable Inputs
The production and use of capital enhances the productivity of
labor and normally increases the demand for labor and drives
up wages.
INPUT DEMAND CURVES
The Prices of Other Inputs

When a firm has a choice among alternative technologies,
and Land Markets
the choice it makes depends to some extent on relative input

prices.
Technological Change
technological change The introduction of

new methods of production or new products
intended to increase the productivity of
existing inputs or to raise marginal products.
Technological change can and does have a powerful influence on factor demands. As new
products and new techniques of production are born, so are demands for new inputs and
new skills. As old products become obsolete, so, too, do the labor skills and other inputs
needed to produce them.
RESOURCE ALLOCATION AND THE MIX OF
OUTPUT IN COMPETITIVE MARKETS
THE DISTRIBUTION OF INCOME

and Land Markets
marginal productivity theory of income

distribution At equilibrium, all factors of
production end up receiving rewards
determined by their productivity as measured
by marginal revenue product.
LOOKING AHEAD
We have now completed our discussion of competitive

labor and land markets. The next chapter takes up the
and Land Markets
complexity of what we have been loosely calling the

capital market. There we discuss the relationship
between the market for physical capital and financial
capital markets, and look at some of the ways that firms
make investment decisions.
REVIEW TERMS AND CONCEPTS
and Land Markets
demand determined price output effect of a factor price

derived demand increase (decrease)
factor substitution effect productivity of an input
marginal product of labor pure rent
(MPL) technological change
marginal productivity theory Equations:
of income distribution MRPL = MPL x PX
marginal revenue product W*= MRPL
(MRP)

Long Run and Short Run Costs

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Long Run and Short Run Costs

Uploaded by

Copyright:

Available Formats

Chapter

Fernando & Yvonn Quijano

Input Demand: The Labor

Input Markets: Basic Concepts

FIGURE 10.1 Firm and Household Decisions

DEMAND FOR INPUTS: A DERIVED DEMAND

derived demand The demand for

productivity of an input The amount of

INPUTS: COMPLEMENTARY AND SUBSTITUTABLE

Inputs can be complementary or substitutable.

marginal product of labor (MPL) The

(2) MARGINAL MARGINAL

The price is essentially profit per sandwich; see discussion in text.

MARGINAL REVENUE PRODUCT

marginal revenue product (MRP) The

FIGURE 10.2 Deriving a Marginal

A FIRM USING ONLY ONE VARIABLE

A profit-maximizing firm will add inputsin the case

Comparing Marginal Revenue and Marginal Cost to

FIGURE 10.4 The Two Profit-Maximizing Conditions Are

FIGURE 10.5 The Trade-Off Facing Firms

A FIRM EMPLOYING TWO VARIABLE FACTORS

In firms employing just one variable factor of production,

Substitution and Output Effects of a Change in

TABLE 10.2 Response of a Firm to an Increasing Wage Rate

UNIT COST IF UNIT COST IF

A (capital intensive) 10 5 $15 $20

When PL = $1, PK = $1,

When PL = $2, PK = $1,

factor substitution effect The tendency

whose price has risen and toward a factor

output effect of a factor price increase

MANY LABOR MARKETS

If labor markets are competitive, the wages in those markets are

demand determined price The price of a

exclusively by what firms and households

pure rent The return to any factor of

FIGURE 10.6 The Rent on Land Is Demand Determined

RENT AND THE VALUE OF OUTPUT PRODUCED ON

The demand for land is a derived demand. Agricultural or

Profit-maximizing condition for the perfectly

PL = MRPL = (MPL x PX)

where L is labor, K is capital, A is land (acres), X is

SHIFTS IN FACTOR DEMAND CURVES

If product demand increases, product price will rise and

The Quantity of Complementary and

The Prices of Other Inputs

the choice it makes depends to some extent on relative input

technological change The introduction of

THE DISTRIBUTION OF INCOME

marginal productivity theory of income

We have now completed our discussion of competitive

complexity of what we have been loosely calling the

demand determined price output effect of a factor price

You might also like