Professional Documents
Culture Documents
Economics: The Markets For The Factors of Production
Economics: The Markets For The Factors of Production
Production
PRINCIPLES OF
ECONOMICS
FOURTH EDITION
N. G R E G O R Y M A N K I W
PowerPoint® Slides
by Ron Cronovich
Quantity of output
0 0 2,000
1 1000 1,500
2 1800 1,000
3 2400 500
4 2800 0
0 1 2 3 4 5
5 3000
No. of workers
CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION 8
Marginal Product of Labor (MPL)
Marginal product of labor: the increase in the
amount of output from an additional unit of labor
∆Q
MPL =
∆L
where
∆Q = change in output
∆L = change in labor
0
0 1 2 3 4 5
L (number of workers)
13
Farmer Jack’s Labor Demand
The VMPL curve
Suppose wage $6,000
W = $2500/week.
5,000
How many
workers should 4,000
Jack hire?
3,000
Answer: L = 3 $2,500
larger L,L,
At any smaller 2,000
can increase profit 1,000
one
by hiring another
fewer worker.
worker. 0
0 1 2 3 4 5
L (number of workers)
CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION 14
VMPL and Labor Demand
For any competitive,
profit-maximizing firm: W
• To maximize profits,
hire workers up to
the point where
VMPL = W. W1
VMPL = P x MPL
Anything that
increases P or
MPL at each L
will increase D2
VMPL and shift
D1
labor demand curve
upward. L
People respond by W2
taking less leisure
and by working more. W1
L
L1 L2
D
L
L1
25
A C T I V E L E A R N I N G 2A:
Answers The market for
autoworkers
The retirement of W
Baby Boomer auto S2
S1
workers shifts
supply leftward. W2
W rises, L falls. W1
D1
L
L2 L1
26
A C T I V E L E A R N I N G 2B:
Answers The market for
autoworkers
A fall in the demand W
for U.S. autos S1
reduces P.
At each L,
VMPL falls. W1
Labor demand W2
curve shifts down.
D1
W and L both fall. D2
L
L2 L1
27
A C T I V E L E A R N I N G 2C:
Answers The market for
autoworkers
At each L, W
MPL rises due to S1
tech. progress.
W2
VMPL rises and
labor demand curve W1
shifts upward.
D2
W and L increase.
D1
L
L1 L2
28
Productivity and Wage Growth in the U.S.