Demand And Supply 16 In Factor Markets
CHAPTER CHECKLISTDemand and Supplyin Factor MarketsChapter161. Describe the anatomy of the markets forlabor, capital, and land.2. Explain how the value of marginal productdetermines the demand for a factor ofproduction.3. Explain how wage rates and employmentare determined.Copyright 2002 Addison WesleyCHAPTER CHECKLIST4. Explain how interest rates, borrowing, andlending are determined.5. Explain how rents and natural resourceprices are determined.LECTURE TOPICSThe Anatomy of Factor MarketsThe Demand for a Factor of ProductionWages and EmploymentFinancial MarketsLand and Natural Resource Markets1
16.1 THE ANATOMY OF FACTOR MARKETSThe four factors of production that produce goods andservices are: Labor Capital Land Entrepreneurship16.1 THE ANATOMY OF FACTOR MARKETSFactor priceThe price of a factor of production. The wage rate is the price of labor. The interest rate is the price of capital. Rent is the price of land.Factor marketA market for labor, capital, or land.16.1 THE ANATOMY OF FACTOR MARKETS16.1 THE ANATOMY OF FACTOR MARKETSLabor MarketsFinancial MarketsLabor marketCapitalA collection of people and firms who are trading laborservices.The tools, instruments, machines, and otherconstructions that have been produced in the past andthat businesses use to produce goods and services.JobA long-term contract between a firm and a householdto provide labor services.Financial capitalThe funds that firms use to buy and operate physicalcapital.2
16.1 THE ANATOMY OF FACTOR MARKETSFinancial Market16.1 THE ANATOMY OF FACTOR MARKETSStock MarketA collection of people and firms who are lending andborrowing to finance the purchase of physical capital.A stock market is a market in which the shares inthe stocks of companies are traded.The two main types of financial market are:Examples: the New York Stock Exchange, NASDAQ. Stock market Bond market16.1 THE ANATOMY OF FACTOR MARKETSBond Market16.1 THE ANATOMY OF FACTOR MARKETSLand MarketsA bond market is a market in which bonds issued byfirms or governments are traded.Land consists of all the gifts of nature.Bondmarkets.A promise to pay specified sums of money onspecified dates.The markets for raw materials are called commodityCompetitive Factor MarketsMost factor markets have many buyers and sellersand are competitive markets.3
16.2 DEMAND IN FACTOR MARKET16.2 DEMAND IN FACTOR MARKETValue of Marginal ProductDerived demandThe demand for a factor of production, which isderived from the demand for the goods and services itis used to produce.Table 16.1 on the next slide walks you through thecalculation of the value of marginal product.Value of marginal productThe value to a firm of hiring one more unit of a factorof production, which equals price of a unit of outputmultiplied by the marginal product of the factor ofproduction.16.2 DEMAND IN FACTOR MARKETThe first two columns ofthe table are the firm’stotal product schedule.To calculate marginalproduct, find thechange in total productas the quantity of laborincreases by 1 worker.16.2 DEMAND IN FACTOR MARKETTo calculate thevalue of marginalproduct, multiply themarginal productnumbers by the priceof a car wash, whichin this example is 3.4
16.2 DEMAND IN FACTOR MARKET16.2 DEMAND IN FACTOR MARKETFigure 16.1shows the valueof the marginalproduct at Max’sWash’n’ Wax.The blue barsshow the valueof the marginalproduct of thelabor that Maxhires based onthe numbers inthe table.16.2 DEMAND IN FACTOR MARKETThe orange lineis the firm’svalue of themarginalproduct of laborcurve.16.2 DEMAND IN FACTOR MARKETA Firm’s Demand for LaborA firm hires labor up to the point at which the value ofmarginal product equals the wage rate.If the value of marginal product of labor exceeds thewage rate, a firm can increase its profit by employingone more worker.If the wage rate exceeds the value of marginal productof labor, a firm can increase its profit by employingone fewer worker.5
16.2 DEMAND IN FACTOR MARKETA Firm’s Demand for Labor CurveA firm’s demand for labor curve is also its value ofmarginal product curve.If the wage rate falls, a firm hires more workers.16.2 DEMAND IN FACTOR MARKET16.2 DEMAND IN FACTOR MARKETFigure 16.2 shows the demandfor labor at Max’s Wash’n’ Wax.At a wage rate of 10.50 anhour, Max makes a profit on thefirst 2 workers but would incur aloss on the third worker.16.2 DEMAND IN FACTOR MARKETFigure 16.2 shows the demandfor labor at Max’s Wash’n’ Wax.At a wage rate of 10.50 anhour, Max makes a profit on thefirst 2 workers but would incur aloss on the third worker.So Max’s quantity of labordemanded is 2 workers.The demand for labor curveslopes downward because thevalue of the marginal product oflabor diminishes as the quantityof labor employed increases.Max’s demand for labor curve isthe same as the value ofmarginal product curve.6
16.2 DEMAND IN FACTOR MARKET16.2 DEMAND IN FACTOR MARKETChanges in the Demand for LaborThe Price of the Firm’s OutputThe demand for labor depends on: The price of the firm’s outputThe higher the price of a firm’s output, the greater isits demand for labor. The prices of other factors of productionThe Prices of Other Factors of Production TechnologyIf the price of using capital decreases relative to thewage rate, a firm substitutes capital for labor andincreases the quantity of capital it uses.Usually, the demand for labor will decrease when theprice of using capital falls.16.2 DEMAND IN FACTOR MARKETTechnologyNew technologies decrease the demand for sometypes of labor and increase the demand for othertypes.16.3 WAGES AND EMPLOYMENTThe Supply of LaborPeople supply labor to earn an income. Many factorsinfluence the quantity of labor that a person plans toprovide, but the wage rate is a key factor.Figure 16.3 on the next slide shows an individual’slabor supply curve.7
16.3 WAGES AND EMPLOYMENTThe tableshows Larry’slabor supplyschedule,which isplotted in thefigure asLarry’s laborsupply curve.16.3 WAGES AND EMPLOYMENT3. As the wagerate rises,Larry’squantity oflaborsupplied 4. increases,5. reaches amaximum, 6. thendecreases.16.3 WAGES AND EMPLOYMENT1. At a wagerate of 10.50 anhour, Larry 2. supplies30 hours oflabor a week.16.3 WAGES AND EMPLOYMENTLarry’s laborsupply curveeventuallybendsbackward.8
16.3 WAGES AND EMPLOYMENTMarket Supply CurveA market supply curve shows the quantity of laborsupplied by all households in a particular job.It is found by adding together the quantities of laborsupplied by all households at each wage rate.Figure 16.4 on the next slide shows the supply of carwash workers.16.3 WAGES AND EMPLOYMENTIn a market fora specific typeof labor, thequantitysuppliedincreases asthe wage rateincreases, otherthingsremaining thesame.16.3 WAGES AND EMPLOYMENTThis supplycurve showshow thequantity of carwash workerssuppliedchanges whenthe wage ratechanges, otherthingsremaining thesame.16.3 WAGES AND EMPLOYMENTInfluences on the Supply of LaborThree key factors influence the supply of labor: Adult population Preferences Time in school and training9
16.2 DEMAND IN FACTOR MARKET A Firm’s Demand for Labor Curve A firm’s demand for labor curve is also its value of marginal product curve. If the wage rate falls, a firm hires more workers. 16.2 DEMAND IN FACTOR MARKET Figure 16.2 shows the demand for labor at Max’s Wash’n’ Wax. At
Table 1.1 Demand Management (source: taken from Philip Kotler, Marketing Management, 11th edn, 2003, p. 6) Category of demand Marketing task 1 Negative demand Encourage demand 2 No demand Create demand 3 Latent demand Develop demand 4 Falling demand Revitalize demand 5 Irregular demand Synchronize demand 6 Full demand Maintain demand
demand), irregular demand (demand varying by season, day, or hour), full demand (a satisfying level of demand), overfull demand (more demand than can be handled), or unwholesome demand (demand for .
Demand 1010 TW Sports Pass On Demand 1011 Pro Sports On Demand 1019 Smithsonian HD On Demand 1020 Local On Demand 1025 Find It On Demand 1026 Travel On Demand 1027 Be Healthy On Demand 1028 1400Automotive On Demand 1200 WXLV (ABC) 1203 WXII (NBC) 1206 WGHP (Fox) 1209 WFMY (CBS) 1212 WCWG (CW) 1215 WMYV (MyNetwork TV) 1218 WGPX (ION)
Supply and Demand Demand tends to go up when price goes down and vice versa. However, demand for some products does not respond readily to changes in price. The degree to which demand for a product is affected by its price is called demand elasticity X. Products have either elastic or inelastic demand. demand elasticity The degree to which demand
Complete the worksheet entitled “Demand and Supply Practice” ( _/15) 3. Government Intervention: . Elasticity of Demand Elasticity of Supply Inelastic Demand Elastic Demand . what is Ashley’ s elasticity of demand as the price of a slice of pizza decreases from 2.00 to
According to Kotler (1973) demand can be characterised by eight unique stages, which assume dissimilar marketing tasks. He differs the following ones: negative demand, no demand, latent demand, uncertain demand, irregular demand, total demand, overdemand and unwanted demand.
together to achieve the best balance between supply and demand. DM is defined as the “management of matching demand and supply over time,” and involves processes that deal with the short term, medium term and long term. It requires coordinated decision making among supply-side managers from supply chain, procurement,
Unit 2: Supply and Demand Now that you have been introduced to basic economic concepts, we can move on to discuss a fundamental economic model that is associated with a market economy: Supply and Demand. Before we learn about supply and demand, like all economic models, it is important to unders
