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Economics
Input Demand:
The Labor and Land Markets
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Firm Choices in Input Markets
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Demand for Inputs: A Derived Demand
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Inputs: Complementary and Substitutable
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Diminishing Returns
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Marginal Revenue Product
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Marginal Revenue Product Per Hour of
Labor in Sandwich Production (One Grill)
(3)
(2) MARGINAL (4) (5)
(1) TOTAL PRODUCT OF PRICE (PX) MARGINAL
TOTAL PRODUCT LABOR (MPL) (VALUE REVENUE
LABOR UNITS (SANDWICHES (SANDWICHES ADDED PER PRODUCT (MPL X PX)
(EMPLOYEES) PER 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
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Marginal Revenue Product Per Hour of
Labor in Sandwich Production (One Grill)
MRPL = PX MPL
• Under diminishing
returns, both MPL and
MRPL eventually
decline.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
A Firm Using One Variable Factor of
Production: Labor
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Marginal Revenue Product and Factor Demand for
a Firm Using One Variable Input (Labor)
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Comparing Marginal Revenue and
Marginal Cost to Maximize Profits
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Two Profit-Maximizing Conditions
• The two profit-maximizing conditions are simply two
views of the same choice process.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Trade-Off Facing Firms
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
A Firm Employing Two Variable
Factors of Production
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Substitution and Output Effects of a
Change in Factor Price
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Substitution and Output Effects of a
Change in Factor Price
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Substitution and Output Effects of a
Change in Factor Price
• When
A (capital intensive)P
= P10
K = $1, the labor-intensive method of
L
5 $15 $20
B (labor intensive) 3 10 $13 $23
producing output is less costly.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Substitution and Output Effects of a
Change in Factor Price
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Land Markets
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Demand Determined Price
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Rent and the Value of Output
Produced on Land
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Firm’s Profit-Maximization
Condition in Input Markets
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Firm’s Profit-Maximization
Condition in Input Markets
M PL M PK M PA 1
PL PK PA PX
• In words, the marginal product of the last dollar
spent on labor must be equal to the marginal
product of the last dollar spent on capital, which
must be equal to the marginal product of the last
dollar spent on land, and so forth.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Input Demand Curves
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Input Demand Curves
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair