PowerPoint Presentations for

Principles of Microeconomics
Sixth Canadian Edition
by Mankiw/Kneebone/McKenzie

Adapted for the

Sixth Canadian Edition by

Marc Prudhomme
University of Ottawa
THE MARKETS
FOR THE FACTORS
OF PRODUCTION
Chapter 18

Copyright 2014 by Nelson Education Ltd. 18-2

 THE MARKETS FOR THE
FACTORS OF PRODUCTION
In 2011, the total income of all Canadians was about
$1.7 trillion.
People earned this income in various ways:
Workers earned about three-quarters of it in the
form of wages and benefits.
The rest went to landowners and to the owners of
capital in the form of rent, profit, and interest.
What determines how much goes to workers?
To landowners?
To the owners of capital?

Copyright 2014 by Nelson Education Ltd. 18-3

 THE MARKETS FOR THE
FACTORS OF PRODUCTION
This chapter provides the basic theory for the analysis
of factor markets.
Factors of production: the inputs used to produce
goods and services
Labour
Land
Capital

The demand for a factor of production is a derived

demand.

Copyright 2014 by Nelson Education Ltd. 18-4

 THE DEMAND FOR LABOUR

Labour markets, like other markets in the

economy, are governed by the forces of
supply and demand.

Copyright 2014 by Nelson Education Ltd. 18-5

 FIGURE 18.1:
The Versatility of Supply and Demand

Copyright 2014 by Nelson Education Ltd. 18-6

The Competitive, Profit-Maximizing Firm
How does an apple producer decide what
quantity of labour to demand?
Two assumptions:
1. The firm is competitive both in the
market for apples and in the market for
apple pickers.
2. The firm is a profit-maximizing firm.

Copyright 2014 by Nelson Education Ltd. 18-7

 The Production Function
and the Marginal Product of Labour

To make its hiring decision, the firm must consider

how the size of its workforce affects the amount
of output produced.

Copyright 2014 by Nelson Education Ltd. 18-8

 The Production Function
and the Marginal Product of Labour

Production function: the relationship between

the quantity of inputs used to make a good
and the quantity of output of that good

Copyright 2014 by Nelson Education Ltd. 18-9

 TABLE 18.1:
How the Competitive Firm Decides How Much Labour to Hire

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 FIGURE 18.2:
The Production Function

Copyright 2014 by Nelson Education Ltd. 18-11

 The Production Function
and the Marginal Product of Labour
Marginal product of labour (MPL): the
increase in the amount of output from an
additional unit of labour
Diminishing marginal product: the property
whereby the marginal product of an input
declines as the quantity of the input
increases

Copyright 2014 by Nelson Education Ltd. 18-12

 The Value of the Marginal Product
and the Demand for Labour
When deciding how many workers to hire,
the firm considers how much profit each
worker would bring in.
Because profit is total revenue minus total
cost, the profit from an additional worker is
the workers contribution to revenue minus
the workers wage.

Copyright 2014 by Nelson Education Ltd. 18-13

 The Value of the Marginal Product
and the Demand for Labour
Value of the marginal product (VMP): the
marginal product of an input times the price
of the output
Economists sometimes call the VMP the
firms marginal revenue product.
It is the extra revenue the firm gets from
hiring an additional unit of a factor of
production.

Copyright 2014 by Nelson Education Ltd. 18-14

 The Value of the Marginal Product
and the Demand for Labour

A competitive, profit-maximizing firm hires

workers up to the point where the value of the
marginal product of labour equals the wage.

Copyright 2014 by Nelson Education Ltd. 18-15

 FIGURE 18.3:
The Value of the Marginal Product of Labour

Copyright 2014 by Nelson Education Ltd. 18-16

 What Causes the
Labour Demand Curve to Shift?

Factors that affect the labour demand curve:

The output price
Technological change
The supply of other factors

Copyright 2014 by Nelson Education Ltd. 18-17

QuickQuiz

Define marginal product of labour and value

of the marginal product of labour.
Describe how a competitive, profit-maximizing
firm decides how many workers to hire.

Copyright 2014 by Nelson Education Ltd. 18-18

Active Learning
Computing MPL and VMPL

L Q
P = $5/bushel. (no. of (bushels of MPL VMPL
Find MPL worker) wheat)

and VMPL, 0 0
fill them in the blank
1 1000
spaces of the table.
2 1800
Then graph
3 2400
a curve with VMPL
on the vertical axis, 4 2800
L on horizontal axis. 5 3000

Copyright 2014 by Nelson Education Ltd. 18-19

Active Learning
Answers

Farmer Jacks L Q
MPL = VMPL = P
(no. of (bushels of
production workers) wheat) Q/L x MPL
function exhibits
diminishing 0 0
1000 $5,000
marginal product: 1 1000
800 4,000
MPL falls as 2 1800
L increases. 600 3,000
3 2400
400 2,000
This property is very 4 2800
common. 200 1,000
5 3000

Copyright 2014 by Nelson Education Ltd. 18-20

Active Learning
Answers The VMPL curve
$6,000
Farmer Jacks
VMPL curve is 5,000
downward 4,000
sloping
due to 3,000
diminishing
marginal 2,000
product. 1,000

0
0 1 2 3 4 5
L (number of workers)
Copyright 2014 by Nelson Education Ltd. 18-21
Active Learning
Answers The VMPL curve
$6,000
Suppose wage
W = $2500/week. 5,000
How many workers
should Jack hire? 4,000
Answer: L = 3
3,000
At any smaller L, can $2,50
increase profit by 02,000
hiring another worker.

At any larger L, can 1,000

increase profit by
hiring one fewer 0
worker. 0 1 2 3 4 5
L (number of workers)
Copyright 2014 by Nelson Education Ltd. 18-22
 THE SUPPLY OF LABOUR

A formal model of labour supply is included in

Chapter 21.
This chapter provides a brief informal
discussion about the decisions that lie behind
the labour supply curve.

Copyright 2014 by Nelson Education Ltd. 18-23

The Tradeoff between Work and Leisure
The labour supply curve reflects how workers
decisions about the labourleisure tradeoff respond
to a change in that opportunity cost.
An upward-sloping labour supply curve means
that an increase in the wage induces workers to
increase the quantity of labour they supply.
A backward-sloping supply curve means that an
increase in the wage induces workers to decrease
the quantity of labour they supply.

Copyright 2014 by Nelson Education Ltd. 18-24

 What Causes the
Labour Supply Curve to Shift?

Factors that affect the labour supply curve:

Changes in tastes
Changes in alternative opportunities
Immigration

Copyright 2014 by Nelson Education Ltd. 18-25

QuickQuiz

Who has a greater opportunity cost of

enjoying leisurea janitor or a brain surgeon?
Explain.
Can this help explain why doctors work such
long hours?

Copyright 2014 by Nelson Education Ltd. 18-26

EQUILIBRIUM IN THE LABOUR MARKET

Two facts about how wages are determined

in competitive labour markets:
1. The wage adjusts to balance the supply
and demand for labour.
2. The wage equals the value of the
marginal product of labour.

Copyright 2014 by Nelson Education Ltd. 18-27

 FIGURE 18.4:
Equilibrium in a Labour Market

Copyright 2014 by Nelson Education Ltd. 18-28

EQUILIBRIUM IN THE LABOUR MARKET

Any event that changes the supply or demand

for labour must change the equilibrium wage
and the value of the marginal product by the
same amount, because these must always be
equal.

Copyright 2014 by Nelson Education Ltd. 18-29

 Shifts in Labour Supply

Suppose that immigration increases the

number of workers willing to pick apples.

Copyright 2014 by Nelson Education Ltd. 18-30

 FIGURE 18.5:
A Shift in Labour Supply

Copyright 2014 by Nelson Education Ltd. 18-31

 Shifts in Labour Demand

Now suppose that an increase in the

popularity of a good causes its price to rise.

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 FIGURE 18.6:
A Shift in Labour Demand

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 TABLE 18.2:
Productivity and Wage Growth in Canada

Copyright 2014 by Nelson Education Ltd. 18-34

QuickQuiz

How does an immigration of workers affect

labour supply, labour demand, the marginal
product of labour, and the equilibrium
wage?

Copyright 2014 by Nelson Education Ltd. 18-35

 THE OTHER FACTORS
OF PRODUCTION: LAND AND CAPITAL

Capital: the equipment

and structures used to
produce goods and
services

Thinkstock

Copyright 2014 by Nelson Education Ltd. 18-36

 Equilibrium in the Markets
for Land and Capital
What determines how much the owners of
land and capital earn for their contribution to
the production process?
The purchase price of land or capital is the
price a person pays to own that factor of
production indefinitely.
The rental price is the price a person pays
to use that factor for a limited period of
time.
Copyright 2014 by Nelson Education Ltd. 18-37
 FIGURE 18.7:
The Markets for Land and Capital

Copyright 2014 by Nelson Education Ltd. 18-38

Linkages among the Factors of Production
The price paid to any factor of production
(labour, land, or capita) = the VMP of that
factor.
The VMP of any factor, in turn, depends on
the quantity of that factor that is available.
When the supply of a factor falls, its
equilibrium factor price rises.

Copyright 2014 by Nelson Education Ltd. 18-39

Linkages among the Factors of Production
When the supply of any factor changes,
however, the effects are not limited to the
market for that factor.
A change in the supply of any one factor
alters the earnings of all the factors.
Moral of the story:
An event that changes the supply of any
factor of production can alter the earnings
of all the factors.
Copyright 2014 by Nelson Education Ltd. 18-40
QuickQuiz

What determines the income of the owners of

land and capital?
How would an increase in the quantity of
capital affect the incomes of those who
already own capital?
How would it affect the incomes of workers?

Copyright 2014 by Nelson Education Ltd. 18-41

THE END

Chapter 18

Copyright 2014 by Nelson Education Ltd. 18-42