PowerPoint Lectures for
CHAPTER 10 Input Demand: The Labor and Land Markets
Principles of Economics,
9e
; ; By
Karl E. Case,
Ray C. Fair &
Sharon M. Oster
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 1 of 36
PART II THE MARKET SYSTEM
Choices Made by Households and Firms
Input Demand: The Labor
10
and Land Markets
CHAPTER 10 Input Demand: The Labor and Land Markets
CHAPTER OUTLINE
Input Markets: Basic Concepts
Demand for Inputs: A Derived Demand
Inputs: Complementary and Substitutable
Diminishing Returns
Marginal Revenue Product
Labor Markets
A Firm Using Only One Variable Factor of
Production: Labor
A Firm Employing Two Variable Factors of
Production in the Short and Long Run
Many Labor Markets
Land Markets
Rent and the Value of Output Produced on Land
The Firm’s Profit-Maximizing Condition in
Input Markets
Input Demand Curves
Shifts in Factor Demand Curves
Resource Allocation and the Mix of Output in
Competitive Markets
The Distribution of Income
Looking Ahead
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 2 of 36
Input Markets: Basic Concepts
Demand for Inputs: A Derived Demand
derived demand The demand for resources
CHAPTER 10 Input Demand: The Labor and Land Markets
(inputs) that is dependent on the demand for the
outputs those resources can be used to produce.
productivity of an input The amount of output
produced per unit of that input.
Inputs are demanded by a firm if and only if
households demand the good or service produced
by that firm.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 3 of 36
Input Markets: Basic Concepts
Inputs: Complementary and Substitutable
Inputs can be complementary or substitutable.
Two inputs used together may enhance, or
CHAPTER 10 Input Demand: The Labor and Land Markets
complement, each other.
Diminishing Returns
marginal product of labor (MPL) The additional
output produced by 1 additional unit of labor.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 4 of 36
When two inputs are used together, we say that the inputs are:
a. Substitutable.
b. Complementary.
c. Highly productive.
d. Homogeneous.
CHAPTER 10 Input Demand: The Labor and Land Markets
e. Dependent of the demand for the output they produce.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 5 of 36
When two inputs are used together, we say that the inputs are:
a. Substitutable.
b. Complementary.
c. Highly productive.
d. Homogeneous.
CHAPTER 10 Input Demand: The Labor and Land Markets
e. Dependent of the demand for the output they produce.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 6 of 36
Input Markets: Basic Concepts
Diminishing Returns
TABLE 10.1 Marginal Revenue Product per Hour of Labor in Sandwich Production (One Grill)
CHAPTER 10 Input Demand: The Labor and Land Markets
(3) (5)
(2) Marginal Marginal
(1) Total Product Of (4) Revenue
Total Labor Product Labor (MPL) Price (PX) (Value Product
Units (Sandwiches (Sandwiches Added per (MPL X PX)
(Employees) per Hour) per Hour) Sandwich)a (per Hour)
0 0
1 10 10 $ 0.50 $ 5.00
2 25 15 0.50 7.50
3 35 10 0.50 5.00
4 40 5 0.50 2.50
5 42 2 0.50 1.00
6 42 0 0.50 0.00
a
The “price” is essentially profit per sandwich; see discussion in text.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 7 of 36
Input Markets: Basic Concepts
Marginal Revenue Product
marginal revenue product (MRP) The additional
CHAPTER 10 Input Demand: The Labor and Land Markets
revenue a firm earns by employing 1 additional
unit of input, ceteris paribus.
MRPL = MPL x PX
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 8 of 36
Input Markets: Basic Concepts
Marginal Revenue Product
CHAPTER 10 Input Demand: The Labor and Land Markets
FIGURE 10.1 Deriving a
Marginal Revenue Product Curve
from Marginal Product
The marginal revenue product of
labor is the price of output, PX,
times the marginal product of
labor, MPL.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 9 of 36
Refer to the figure. What explains the
shape of this curve in a framework
of competitive input and output
markets?
a. Increasing marginal product of
labor but decreasing output price.
b. Decreasing marginal product of
CHAPTER 10 Input Demand: The Labor and Land Markets
labor along with lower output price.
c. Diminishing marginal returns and,
consequently, decreasing marginal
product of labor, but not output
price.
d. Increasing marginal returns but
decreasing output price.
e. Increasing output price, decreasing
marginal product of labor, and
diminishing returns.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 10 of 36
Refer to the figure. What explains the
shape of this curve in a framework
of competitive input and output
markets?
a. Increasing marginal product of
labor but decreasing output price.
b. Decreasing marginal product of
CHAPTER 10 Input Demand: The Labor and Land Markets
labor along with lower output price.
c. Diminishing marginal returns
and, consequently, decreasing
marginal product of labor, but
not output price.
d. Increasing marginal returns but
decreasing output price.
e. Increasing output price, decreasing
marginal product of labor, and
diminishing returns.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 11 of 36
Labor Markets
A Firm Using Only One Variable Factor of Production: Labor
CHAPTER 10 Input Demand: The Labor and Land Markets
FIGURE 10.2 Marginal Revenue Product and Factor
Demand for a Firm Using One Variable Input (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. A perfectly competitive firm will hire labor as long
as MRPL is greater than the going wage, W*. The hypothetical firm will demand 210 units of labor.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 12 of 36
Labor Markets
A Firm Using Only One Variable Factor of Production: Labor
Comparing Marginal Revenue and Marginal Cost to Maximize Profits
CHAPTER 10 Input Demand: The Labor and Land Markets
FIGURE 10.3 The Two Profit-Maximizing Conditions
Are Simply Two Views of the Same Choice Process
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 13 of 36
From the viewpoint of the business firm, the market wage is conceptually
the same as:
a. The marginal cost of a unit of labor.
b. Marginal revenue.
c. Marginal revenue product.
CHAPTER 10 Input Demand: The Labor and Land Markets
d. Marginal product.
e. The firm’s demand for labor.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 14 of 36
From the viewpoint of the business firm, the market wage is conceptually
the same as:
a. The marginal cost of a unit of labor.
b. Marginal revenue.
c. Marginal revenue product.
CHAPTER 10 Input Demand: The Labor and Land Markets
d. Marginal product.
e. The firm’s demand for labor.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 15 of 36
Labor Markets
A Firm Using Only One Variable Factor of Production: Labor
Deriving Input Demands
Calculating the marginal product of a variable input
CHAPTER 10 Input Demand: The Labor and Land Markets
(labor) and marginal revenue product is essentially
the same for both big corporations and small
proprietorships.
Workers are hired because the entrepreneur
expects that their current efforts will produce future
revenues greater than their wage costs.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 16 of 36
In order to maximize profit, a firm will hire workers up until:
a. P = MC.
b. MR = MC
c. W = MPL
d. W = MRPL
CHAPTER 10 Input Demand: The Labor and Land Markets
e. P = MC = SRAC = LRAC
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 17 of 36
In order to maximize profit, a firm will hire workers up until:
a. P = MC.
b. MR = MC
c. W = MPL
d. W = MRPL
CHAPTER 10 Input Demand: The Labor and Land Markets
e. P = MC = SRAC = LRAC
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 18 of 36
Labor Markets
A Firm Employing Two Variable Factors of Production in the Short and
Long Run
Substitution and Output Effects of a Change in Factor Price
CHAPTER 10 Input Demand: The Labor and Land Markets
TABLE 10.2 Response of a Firm to an Increasing Wage Rate
Unit Cost if Unit Cost if
Input Requirements PL = $1 PL = $2
Per Unit Of Output PK = $1 PK = $1
Technology K L (PL x L) + (PK x K) (PL x L) + (PK x K)
A (capital intensive) 10 5 $15 $20
B (labor intensive) 3 10 $13 $23
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 19 of 36
Labor Markets
A Firm Employing Two Variable Factors of Production in the Short and
Long Run
Substitution and Output Effects of a Change in Factor Price
CHAPTER 10 Input Demand: The Labor and Land Markets
TABLE 10.3 The Substitution Effect of an Increase in Wages on a Firm
Producing 100 Units of Output
To Produce 100 Units of Output
Total Total Total
Capital Labor Variable
Demanded Demanded Cost
When PL = $1, PK = $1,
300 1,000 $1,300
firm uses technology B
When PL = $2, PK = $1,
1,000 500 $2,000
firm uses technology A
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 20 of 36
Labor Markets
A Firm Employing Two Variable Factors of Production in the Short and
Long Run
Substitution and Output Effects of a Change in Factor Price
CHAPTER 10 Input Demand: The Labor and Land Markets
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.
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.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 21 of 36
Labor Markets
Many Labor Markets
If labor markets are competitive, the wages in
CHAPTER 10 Input Demand: The Labor and Land Markets
those markets are determined by the interaction of
supply and demand. As we have seen, 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.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 22 of 36
Land Markets
demand-determined price The price of a good
that is in fixed supply; it is determined exclusively
by what firms and households are willing to pay for
the good.
CHAPTER 10 Input Demand: The Labor and Land Markets
pure rent The return to any factor of production
that is in fixed supply.
FIGURE 10.5 The Rent on Land Is
Demand-Determined
Because land in general (and each
parcel in particular) is in fixed
supply, its price is demand-
determined. Graphically, a fixed
supply is represented by a vertical,
perfectly inelastic supply curve.
Rent, R0, depends exclusively on
demand—what people are willing
to pay.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 23 of 36
What is the special feature that makes land different from capital and
labor?
a. Land is in fixed supply, which means that its price is strictly
determined by the amount available, or supply.
b. Land is in fixed supply, which means that its price is strictly
determined by demand.
CHAPTER 10 Input Demand: The Labor and Land Markets
c. The supply of land is perfectly elastic.
d. The demand for land is perfectly inelastic.
e. Unlike capital and labor, both supply and demand for land determine
the price of land.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 24 of 36
What is the special feature that makes land different from capital and
labor?
a. Land is in fixed supply, which means that its price is strictly
determined by the amount available, or supply.
b. Land is in fixed supply, which means that its price is strictly
determined by demand.
CHAPTER 10 Input Demand: The Labor and Land Markets
c. The supply of land is perfectly elastic.
d. The demand for land is perfectly inelastic.
e. Unlike capital and labor, both supply and demand for land determine
the price of land.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 25 of 36
Land Markets
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 product
CHAPTER 10 Input Demand: The Labor and Land Markets
produced on that land is sufficient to cover the
price of the land. Stated in equation form, the firm
will use land up to the point at which MRPA= PA,
where A is land (acres).
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 26 of 36
The Firm’s Profit-Maximizing Condition in Input Markets
Profit-maximizing condition for the perfectly
competitive firm is
CHAPTER 10 Input Demand: The Labor and Land Markets
PL = MRPL = (MPL x PX)
PK = MRPK = (MPK x PX)
PA = MRPA = (MPA x PX)
where L is labor, K is capital, A is land (acres), X
is output, and PX is the price of that output.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 27 of 36
REVIEW TERMS AND CONCEPTS
demand-determined price output effect of a factor price
increase (decrease)
derived demand
productivity of an input
CHAPTER 10 Input Demand: The Labor and Land Markets
factor substitution effect
pure rent
marginal product of labor
(MPL) technological change
marginal productivity theory Equations:
of income distribution MRPL = MPL x PX
marginal revenue product
W*= MRPL
(MRP)
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 28 of 36
