Ch. 17: Demand and Supply in Factor Markets. The firm’s choice of the quantities of labor and capital to employ. People’s choices of the quantities of labor and capital to supply. Explain how wages and interest rates are determined in competitive resource markets. Factor Prices and Incomes.
Factors of production
Income earned by the owner of a factor of production equals the equilibrium price multiplied by the equilibrium quantity.
Suppose that the demand for carpenters decreases. If the supply of carpenters is more inelastic, the wage rate for carpenters will fall (more, less) and the equilibrium employment of carpenters will fall (more, less).
Suppose that the supply of carpenters decreases. If the demand for carpenters is inelastic, the percentage increase in the wage rate will be (greater, less) than the percentage decrease in employment and the total income of carpenters will (rise, fall).
Source: St. Louis Federal Reserve Bank
Source: Bureau of Labor Statistics
MRPL = W (profit-maximizing level of employment)
MRMP = W.
MR = W/MP.
But W/MP = MC MR = MC (profit maximizing level of output)
The demand for labor (MRPL ) rises and the demand for labor curve shifts if:
Suppose you earn $20 per hour and work 40 hours per week. If your wage increases to $30 per hour, how would you want to adjust your work hours?
Hours of labor
Because of the recent stock market collapse, many households have decided that it’s necessary to increase their rate of saving. This should cause an increase in ____ and ____ interest rates.
Because of pessimistic outlooks for future consumer demand, many firms have decided that new capital purchases are not likely to be profitable at this point. This would cause