Unemployment
Those 16 years and older who are willing and able
to work and who are actively looking for work but
have not found a job.

What are the costs of unemployment?
 Lost

output. Psychological impact.
Discouraged Workers
 Individuals
who have stopped looking for a job
because they are convinced they will not find
a suitable one. Not considered unemployed.

Types of Unemployment
 Frictional,
Structural, Cyclical, Seasonal
Significance of Resource
Pricing

Money-income determination
 Household

Resource allocation
 Shift

of resources
Cost minimization
 Profit

income
= Revenue minus Costs
Ethical questions and policy issues
 Equality,
taxes, regulation
Derived Demand
Strength of demand
depends on:


The productivity of the
resource in helping to
create a good.
The market value or
price of the good it
helps produce.
Marginal Product

The marginal product of any input into
production is the increase in the quantity
of output obtained from an additional unit
of that input.
Marginal Product

The marginal product of any input into
production is the increase in the quantity
of output obtained from an additional unit
of that input.
Additional output
Marginal product =
Additional input
Diminishing Marginal Product

Diminishing marginal product is the
property whereby the marginal product of
an input declines as the quantity of the
input increases.

Example: As more and more workers are hired
at a firm, each additional worker contributes less
and less to production because the firm has a
limited amount of equipment.
The Production Function and The
Marginal Product of Labor

The production function illustrates the
relationship between the quantity of inputs
used and the quantity of output of a good.
The Production Function and The
Marginal Product of Labor

The marginal product of labor is the
increase in the amount of output from an
additional unit of labor.
MPL = D Q/D L
MPL = (Q2 – Q1)/(L2 – L1)
The Production Function and The
Marginal Product of Labor
Quantity
of Apples
Production
function
300
280
240
180
100
0
1
2
3
4
5
Quantity of
Apple Pickers
Diminishing Marginal Product of
Labor
As the number of workers increases, the
marginal product of labor declines.
 As more and more workers are hired, each
additional worker contributes less to
production than the prior one.
 The production function becomes flatter as
the number of workers rises.

Diminishing Marginal Product of
Labor
Quantity
of Apples
Production
function
300
280
240
180
100
0
1
2
3
4
5
Quantity of
Apple Pickers
Factors of Production

Factors of production are the inputs used
to produce goods and services.
The Market for the Factors of
Production
What are the major factors of production?
 What determines how much is paid for
each factor of production?
 What determines how much of each factor
of production will be purchased?

A Firm’s Demand For Labor
Labor is the most important factor of
production.
 Labor markets, like other markets in the
economy, are governed by the forces of
supply and demand.

A Firm’s Demand For Labor
The Market for Apples
The Market for Apple Pickers
Price of
Apples
Supply
P
Wage of
Apple
Pickers
Supply
W
Demand
Demand
0
Q
Quantity of
Apples
0
L
Quantity of
Apple Pickers
Determinants of Resource Demand
Changes in the Price of other resources
 Changes in Productivity



technological improvements
Changes in Product Demand

resource demand is derived from product
demand.
A Firm’s Demand For Labor

Most labor services, rather than being final
goods ready to be enjoyed by consumers,
are inputs into the production of other
goods.
The Competitive
Profit-Maximizing Firm

Two basic assumptions about the firm are:
 It is competitive in both the product
market and the input market.
 Its goal is to maximize profits.
The Competitive
Profit-Maximizing Firm

The firm must consider how the size of its
workforce affects the amount of output that
is produced.
Rule for Employing Resources
 MRP

= MRC rule
It will be profitable for a firm to hire additional
units of a resource up to the point at which
that resource’s MRP = MRC.
 MRP is also equal to the resource demand
curve.
How many workers to hire?

To maximize profits, the firm considers
how much profit each worker would bring
in.
 Called the value of the marginal product.
Value of the Marginal Product

The value of the marginal product is
measured in dollars.

It diminishes as the number of workers
rises because the market price of the good
is constant.
Value of the Marginal Product
Value of
the
Marginal
Product
Value of marginal product
(demand curve for labor)
0
Quantity of
Apple Pickers
Labor-Market Equilibrium
Labor supply and labor demand determine
the equilibrium wage.
 Shifts in the supply or demand curve for
labor cause the equilibrium wage to
change.

Labor-Market Equilibrium

Profit maximization by competitive firms
demanding labor ensures that the
equilibrium wage always equals the value
of the marginal product of labor.

The wage adjusts to balance the supply
and demand for labor.
Labor-Market Equilibrium
Wage
(price of
labor)
Supply
Equilibrium
wage, W
Demand
0
Equilibrium
employment, L
Quantity of
Labor
Shifts in the Supply and
Demand of Labor

Shift in Supply of Labor
 May be caused by a change in the number
of workers.

Shift in Demand for Labor
 May be caused by a change in the
demand for the final product produced by
labor, labor productivity, and prices of other
resources.
Shift in Labor Supply

An increase in the supply of labor :
 Results in a surplus of labor.
 Puts downward pressure on wages.
 Makes it profitable for firms to hire more
workers.
 Results in diminishing marginal product.
 Lowers the value of the marginal product.
 Gives a new equilibrium.
Shift in Labor Supply
Wage
(price of
labor)
0
Quantity of
Labor
Shift in Labor Supply
Wage
(price of
labor)
Supply, S1
Demand
0
Quantity of
Labor
Shift in Labor Supply
Wage
(price of
labor)
Supply, S1
W1
Demand
0
L1
Quantity of
Labor
Shift in Labor Supply
Wage
(price of
labor)
Supply, S1
S2
W1
Demand
0
L1
Quantity of
Labor
Shift in Labor Supply
Wage
(price of
labor)
Supply, S1
1. An increase in
labor supply...
S2
W1
Demand
0
L1
Quantity of
Labor
Shift in Labor Supply
Wage
(price of
labor)
Supply, S1
1. An increase in
labor supply...
S2
W1
W2
Demand
0
L1
L2
Quantity of
Labor
Shift in Labor Supply
Wage
(price of
labor)
Supply, S1
1. An increase in
labor supply...
S2
W1
W2
2. ...reduces
the wage...
Demand
0
L1
L2
Quantity of
Labor
Shift in Labor Supply
Wage
(price of
labor)
Supply, S1
1. An increase in
labor supply...
S2
W1
W2
2. ...reduces
the wage...
Demand
3. ...and raises employment.
0
L1
L2
Quantity of
Labor
Shift in Labor Demand

An increase in the demand for labor :
 Makes it profitable for firms to hire more
workers.
 Puts upward pressure on wages.
 Raises the value of the marginal product.
 Gives a new equilibrium.
Shift in Labor Demand
Wage
(price of
labor)
0
Quantity of
Labor
Shift in Labor Demand
Wage
(price of
labor)
Supply
Demand, D1
0
Quantity of
Labor
Shift in Labor Demand
Wage
(price of
labor)
Supply
W1
Demand, D1
0
L1
Quantity of
Labor
Shift in Labor Demand
Wage
(price of
labor)
Supply
W1
D2
Demand, D1
0
L1
Quantity of
Labor
Shift in Labor Demand
Wage
(price of
labor)
Supply
1. An increase in
labor demand...
W1
D2
Demand, D1
0
L1
Quantity of
Labor
Shift in Labor Demand
Wage
(price of
labor)
Supply
W2
1. An increase in
labor demand...
W1
D2
Demand, D1
0
L1
L2
Quantity of
Labor
Shift in Labor Demand
Wage
(price of
labor)
Supply
W2
1. An increase in
labor demand...
W1
2. ...increases
the wage...
D2
Demand, D1
0
L1
L2
Quantity of
Labor
Shift in Labor Demand
Wage
(price of
labor)
Supply
W2
1. An increase in
labor demand...
W1
2. ...increases
the wage...
D2
Demand, D1
0
L1
L2
Quantity of
Labor
3. ...and increases employment.
Combination of Several
Resources

The Profit-Max Rule
 MRP

= MRC
The Least-Cost Rule
 MPL/PL
= MPc/Pc
 McConnell
pgs. 322-324
The Least Cost Rule
 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)
Elasticity of Resource Demand

Ease of Substitutes
 Receptionists


vs Physicians
Elasticity of Product Demand
Percent of Total Cost
Case Study:
Productivity and Wages

What causes productivity and wages to
vary so much over time and across
countries?
 Physical Capital: When workers work
with a larger quantity of equipment and
structures, they produce more.
 Human Capital: When workers are more
educated, they produce more.
Case Study:
Productivity and Wages

What causes productivity and wages to
vary so much over time and across
countries?
 Technological Knowledge: When
workers have access to more sophisticated
technologies, they produce more.
Quick Quiz!

How does the immigration of workers
affect labor supply, labor demand, the
marginal product of labor, and the
equilibrium wage?
The Rental Price and Quantity of
Land and Capital
Land and capital are paid the value of their
marginal product.
 They each earn the value of their marginal
contribution to the production process.

The Purchase Price and Quantity
of Land and Capital

The equilibrium purchase price of land and
capital depends on the following:
 The current value of the marginal
product.
 The value of the marginal product
expected to prevail in the future.
Linkages Among the Factors of
Production

Factors of production are used together.
 The marginal product of any one factor
depends on the quantities of all factors
that are available.
Linkages Among the Factors of
Production

A change in the supply of one factor alters
the equilibrium earnings of all the factors.
Economic Rent

Price paid for the use of natural resources
that are completely fixed in supply.

Helps allocate land for different uses.

Surplus payment
 Payment
above the amount needed to gain use of the
resource. Land would be available to society even if
rent was not paid.
Interest

Price paid for the use of money.
Remember that money is a medium of
exchange, not a resource.

Interest is paid to the resource owner.

Interest rates show the amount of money
available for borrowing.
Interest

Interest rates are established in the
loanable funds market (supply and
demand).
 Demand
for funds is based on consumption.
 Supply of funds is based on savings.

Interest rates can vary depending on risk,
loan size, and length of loan.