Chapter Eighteen: The Economics of Labor Markets (Level of Difficulty 1 1/2)

The inputs used to produce goods and services are known as factors of production. Where a firm's decision to supply a good in another market would determine the firm's demand for a factor of production. The production function then comes in play, to show the relationship between the quantity of inputs and the amount of output that is being produced. There is a diminishing marginal product of labor where as the number of workers increases the marginal product of labor declines. Due to the fact that the price of a good is constant the value of marginal product of labor declines. For the firm the profit maximization happens where the wage is equivalent to the value of the marginal product of labor, thus if this is true then price is equal to marginal cost. Demand curves may be shifted due to the output price, technological change or the supply of other factors. The labor supply curve on the other hand may be shifted due to changes in taste, alternative opportunities or immigration. Both supply and demand are balanced where wage is equal to the value of marginal production of labor. Productivity has three main determinants: physical capital, larger quantity of equipment gets more production, human capital, education leads to more production and technological knowledge, workers have access to technology to produce more. Land and capital are the stock of equipment and structures used for production. Rental price of land and of capital is determined due to the supply and demand curves where a firm would increase the quantity hired until marginal product is equal to the factor's price. Factors link to one another thus each factors affects another.