McConnellMicro13_Ch13.ppt

PART 4 MICROECONOMICS OF FACTOR MARKETS Prepared by Dr. Amy Peng Ryerson University © 2013 McGraw-Hill Ryerson Ltd. Explain how factor prices are determined. Discuss what determines the demand for a factor. Discuss what determines the elasticity of factor demand. Determine how a firm arrives at the optimal combination of factors to use in the production process. © 2013 McGraw-Hill Ryerson Ltd. Chapter 13 * Reasons to study how factor prices are determined: Money-Income Determination Resource Allocation Cost Minimization Policy Issues © 2013 McGraw-Hill Ryerson Ltd. Chapter 13, LO1 * Factor demand is a derived demand Marginal Revenue Product Productivity Price of the good it helps to produce Marginal Revenue Product = Change in Total Revenue Unit Change in Resource Quantity © 2013 McGraw-Hill Ryerson Ltd. Chapter 13, LO1 * Resource Wage (Wage Rate) Quantity of Factor Demanded (1) Units of Resource (2) Total Product (Output) (3) Marginal Product (MP) (4) Product Price (5) Total Revenue, (2) X (4) (6) Marginal Revenue Product (MRP) 0 1 2 3 4 5 6 7 0 7 13 18 22 25 27 28 7 6 5 4 3 2 1 $2 2 2 2 2 2 2 2 $ 0 14 26 36 44 50 54 56 $14 12 10 8 6 4 2 ] ] ] ] ] ] ] ] ] ] ] ] ] ] 1 2 3 4 5 6 7 0 -2 2 4 6 8 10 12 14 16 $18 D=MRP F13.1 Perfectly Competitive Firm’s Demand for A Factor LO1 12-* © 2013 McGraw-Hill Ryerson Ltd. Chapter 13, LO1 * Rule for employing factors: MRP = MRC MRP as the factor demand schedule Factor demand under imperfect product market competition Marginal Factor Cost = Change in Total (Factors) Cost Unit Change in Factor Quantity © 2013 McGraw-Hill Ryerson Ltd. Chapter 13, LO1 * 0 1 2 3 4 5 6 7 0 7 13 18 22 25 27 28 7 6 5 4 3 2 1 $2.80 2.60 2.40 2.20 2.00 1.87 1.75 1.65 $ 0.00 18.20 31.20 39.60 44.00 46.25 47.25 46.20 $18.20 13.00 8.40 4.40 2.25 1.00 -1.05 ] ] ] ] ] ] ] ] ] ] ] ] ] ] 1 2 3 4 5 6 7 0 -2 2 4 6 8 10 12 14 16 $18 Factor Price (Wage Rate) Quantity of Factor Demanded D=MRP (Pure Competition) Imperfectly Competitive Firm’s Demand for A Factor D=MRP (Imperfect Competition) (1) Units of Resource (2) Total Product (Output) (3) Marginal Product (MP) (4) Product Price (5) Total Revenue, (2) X (4) (6) Marginal Revenue Product (MRP) LO1 12-* © 2013 McGraw-Hill Ryerson Ltd. Chapter 13, LO1 * Changes in Product Demand Changes in Productivity Quantities of Other Factors Technological Progress Quality of the Variable Factor © 2013 McGraw-Hill Ryerson Ltd. Chapter 13, LO2 * Changes in the Prices of Other Factors Substitute Factors of Production Substitution Effect Output Effect Net Effect Complementary Factors of Production © 2013 McGraw-Hill Ryerson Ltd. Chapter 13, LO2 * The demand of labour will increases when The demand for the product produced by that labour increases. The productivity (MP) of labour increases. The price of a substitute input decreases, provided the output effect exceeds the substitution effect. The price of a substitute input increases, provided the substitution effect exceeds the output effect. The price of a complementary input decreases. © 2013 McGraw-Hill Ryerson Ltd. Chapter 13, LO2 * © 2013 McGraw-Hill Ryerson Ltd. Chapter 13, LO2 * LO2 12-* © 2013 McGraw-Hill Ryerson Ltd. Chapter 13, LO2 * Determinants of Efd Ease of resource substitutability Elasticity of product demand Ratio of resource cost to total cost Efd = Percentage Change in Factor Quantity Percentage Change in Factor Price LO2 12-* © 2013 McGraw-Hill Ryerson Ltd. Chapter 13, LO3 * LO3 12-* All factor inputs are variable Choose the optimal combination Minimize cost of producing a given output Maximize profit © 2013 McGraw-Hill Ryerson Ltd. Chapter 13, LO4 * Minimize cost of producing a given output Last dollar spent on each resource yields the same marginal product Marginal Product Of Labor (MPL) Price of Labor (PL) Marginal Product Of Capital (MPC) Price of Capital (PC) = LO3 12-* © 2013 McGraw-Hill Ryerson Ltd. Chapter 13, LO4 * Producing 50 units of output using the least-cost rule: MPL/PL = MPC/PC © 2013 McGraw-Hill Ryerson Ltd. Chapter 13, LO4 * MRP of each factor equals its price MRPL PL MRPC PC = = 1 MRPL PL = MRPC PC = and LO3 12-* © 2013 McGraw-Hill Ryerson Ltd. Chapter 13, LO4 * Profit-Maximizing combination of Labour and Capital: MRP = Price © 2013 McGraw-Hill Ryerson Ltd. Chapter 13, LO4 * Paid according to value of service Workers Resource owners Inequality Productive resources unequally distributed Market imperfections LO3 12-* © 2013 McGraw-Hill Ryerson Ltd. Chapter 13, LO4 * Banks use ATMs instead of people Least-cost combination of resources ATMs debuted about 35 years ago 11 billion U.S. transactions per year 80,000 tellers eliminated 1990-2000 Former tellers find new jobs Customer convenience © 2013 McGraw-Hill Ryerson Ltd. Chapter 13 * 13.1 Factor Pricing and Demand MRP (cases of perfect and imperfect competition) 13.2 Determinants of Factor Demand Change in demand Change in the productivity Change in price (substitution and price effect) 13.3 Elasticity of Factor Demand 13.4 Optimal Combination of Factors Least-cost rule and profit-maximization rule © 2013 McGraw-Hill Ryerson Ltd. Chapter 13 *