PRINCIPLE OF ECONOMIC
6 EDITION
KARL CASE, RAY FAIR
PRENTICE HALL BUSINESS PUBLISHING
COPY RIGHT 2002
Demand for Inputs:
A Derived Demand
•
Derived demand
is demand for resources (inputs) that is dependent on the demand for the
outputs those resources can be used to produce.
•
Inputs are demanded by a firm if, and
only if, households demand the good or service produced by that firm.
Inputs:
Complementary and Substitutable
•
The productivity of an input
is the amount of output produced per unit of that input.
•
Inputs can be complementary or substitutable. This means that a firm’s input demands are
tightly linked together.
Diminishing Returns
•
Faced with a capacity constraint in the
short-run, a firm that decides to increase output will eventually encounter
diminishing returns.
•
Marginal product of labor (MPL)
is the additional output produced by one additional unit of labor.
Marginal Revenue Product
•
The marginal revenue product (MRP)
of a variable input is the additional revenue a firm earns by employing one
additional unit of input, ceteris paribus.
•
MRPL
equals the price of output, PX, times the marginal product of
labor, MPL.
Marginal Revenue Product Per Hour of Labor in
Sandwich Production (One Grill)
•
When output price is constant, the
behavior of MRPL depends only on the behavior of MPL.
•
Under diminishing returns, both MPL
and MRPL eventually decline.
A Firm Using One Variable Factor of Production: Labor
•
A competitive firm using only one
variable factor of production will use that factor as long as its marginal
revenue product exceeds its unit cost.
•
If the firm uses only labor, then it
will hire labor as long as MRPL is greater than the going
wage, W*.
Short-Run Demand Curve for a Factor of Production
•
When a firm uses only one variable
factor of production, that factor’s marginal revenue product curve is the
firm’s demand curve for that factor in the short run.
Comparing Marginal Revenue and Marginal Cost to
Maximize Profits
•
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.
•
Firms weigh the value of outputs as
reflected in output price against the value of inputs as reflected in marginal
costs.
A Firm Employing Two Variable Factors of Production
•
Land, labor, and capital are used
together to produce outputs.
•
When an expanding firm adds to its stock
of capital, it raises the productivity of its labor, and vice versa. Each factor complements the other.
Substitution and Output Effects of a Change in
Factor Price
•
Two effects occur when the price of an
input changes:
•
Factor substitution effect: The tendency of firms to substitute away from
a factor whose price has risen and toward a factor whose price has fallen.
Substitution and Output Effects of a Change in
Factor Price
•
Two effects occur when the price of an
input changes:
•
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.
Many Labor Markets
•
If labor markets are competitive, the
wages in those markets are determined by the interaction of supply and demand.
•
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
•
Unlike labor and capital, the total
supply of land is strictly fixed (perfectly inelastic.
Demand Determined Price
•
The price of a good that is in fixed
supply is demand determined.
•
Because land is fixed in supply, its
price is determined exclusively by what households and firms are willing to pay
for it.
•
The return to any factor of production
in fixed supply is called pure rent.
Land in a Given Use Versus Land of a Given Quality
•
The supply of land in a given use
may not be perfectly inelastic or fixed.
•
The supply of land of a given quality
at a given location is truly fixed in supply.
Rent and the Value of Output Produced on Land
•
A firm will pay for and use land as long
as the revenue earned from selling the output produced on that land is
sufficient to cover the price of the land.
•
The firm will use land (A) up to
the point at which:
Impact of Technological Change
•
Technological change
refers to 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.
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