Docstoc

3

Document Sample
3 Powered By Docstoc
					Factor Demand
            Factor Demand
• Inputs are also called factors of production

• So, the demand for inputs is called factor
  demand.

• To know how many inputs we want, need
  to know the value of output (price) and the
  cost of the input.
          Some Ag Prices
• Today’s trading:
  http://money.cnn.com/data/commodities/
           Some Ag Costs
• Average Pasture Value in Texas ($/acre)
  – 1998: $550
  – 2002: $600
  – 2005: $869
  – 2007: $1,370

                             -USDA NASS, August 2007
           Simple Example
• The value of output is just the price.
  – Assume price is constant: can sell as much as
    you want at P.
  –P=5
• The price of labor is just the wage.
  – Assume the wage is constant: can hire a
    many workers (or as many hours) as you
    want at w.
  – w = 10
 Value of the Marginal Product
• The value of the marginal product, VMP, is
  how much more revenue the firm gets
  when they sell the output produced by
  using an additional input (here: labor).


             VMP = P*MP
           VMP
 L   TP    AP   MP   P   VMP
 0    0     0
 1    2     2    2   5    10
 2    8     4    6   5    30
 3   21     7   13   5    65
 4   32     8   11   5    55
 5   40     8    8   5    40
 6   45   7.5    5   5    25
 7   49     7    4   5    20
 8   52   6.5    3   5    15
 9   54     6    2   5    10
10   54   5.4    0   5     0
                           MP and VMP
                             Marginal Product

              70
                                                    VMP        MP
              60
Output/ VMP




              50
              40
              30
              20
              10
              0
                   0   2     4         6        8         10        12
                                     Labor
        Marginal Factor Cost
• The marginal factor cost, MFC, is the cost
  of adding another factor of production.

• For labor, the MFC = w.


                MFC = w
                   VMP and MFC
                   Value of the Marginal Product

      70
                                                   VMP
      60
      50
      40
VMP




      30
      20
      10                                                  w
      0
           0   2         4          6          8     10       12
                                  Labor
                     VMP and MFC
                     Value of the Marginal Product
                                               VMP > w
      70
      60       VMP                             “What comes into your cash
                                               register from hiring is more
      50                                       than what goes out”
      40
VMP




                                               HIRE THE WORKER!
      30
      20
      10                                                           w
      0
           0     2         4          6          8            10              12
                                    Labor
                     VMP and MFC
                     Value of the Marginal Product
                                               VMP > w
      70
      60       VMP                             “What comes into your cash
                                               register from hiring is more
      50                                       than what goes out”
      40
VMP




                                               KEEP HIRING!
      30
      20
      10                                                           w
      0
           0     2         4          6          8            10              12
                                    Labor
                     VMP and MFC
                     Value of the Marginal Product

      70                                       VMP = w
      60       VMP
                                               What you paid for the worker
      50                                       equals the additional revenue
      40                                       they brought in
VMP




      30
      20
      10                                                          w
      0
           0     2         4          6          8           10           12
                                    Labor
                     VMP and MFC
                     Value of the Marginal Product
                                               VMP < w
      70
      60       VMP                             “What comes into your cash
                                               register from hiring is less than
      50                                       what goes out”
      40
VMP




                                               STOP HIRING!
      30
      20
      10                                                            w
      0
           0     2         4          6          8             10            12
                                    Labor
                The RULE
• This leads to a simple rule for factor
  demand:


           VMP = MFC
              2 Problems
• At a given price, how much labor does the
  firm want? Factor demand.

• At a given price and wage, how much
  does the firm decide to produce and how
  much does it earn? Profit maximization.
                     Factor Demand
                     Value of the Marginal Product
                                               If the wage is 10, you hire 9
      70                                       workers.
      60       VMP
      50
      40
VMP




      30
      20
      10                                                           w
      0
           0     2         4          6          8            10               12
                                    Labor
                     Factor Demand
                     Value of the Marginal Product
                                               If the wage is 10, you hire 9
      70                                       workers.
      60       VMP                             If the wage is 20, you hire 7
                                               workers.
      50
      40
VMP




      30
      20                                                           w
      10
      0
           0     2         4          6          8            10               12
                                    Labor
                     Factor Demand
                     Value of the Marginal Product
                                               If the wage is 10, you hire 9
      70                                       workers.
      60       VMP                             If the wage is 20, you hire 7
                                               workers.
      50                                       If the wage is 40, you hire 5
                                               workers.
      40
VMP




                                                                   w
      30
      20
      10
      0
           0     2         4          6          8            10               12
                                    Labor
              Question?
• Why do you never hire when VMP is still
  rising?
                     Factor Demand
                     Value of the Marginal Product
                                               If the wage is 10, you hire 9
      70                                       workers.
      60       VMP                             If the wage is 20, you hire 7
                                               workers.
      50                                       If the wage is 40, you hire 5
                                               workers.
      40
VMP




                                                                   w
      30
      20
      10
      0
           0     2         4          6          8            10               12
                                    Labor
               Question?
• Why do you never hire when VMP is still
  rising?

• Because, hiring an additional worker will
  result in VMP > MFC and thus you would
  want to hire an additional worker.
                     Factor Demand
                     Value of the Marginal Product
                                               If the wage is 10, you hire 9
      70                                       workers.
      60       VMP                             If the wage is 20, you hire 7
                                               workers.
      50                                       If the wage is 40, you hire 5
                                               workers.
      40
VMP




                                                                   w
      30
      20
      10
      0
           0     2         4          6          8            10               12
                                    Labor
             Firm Factor Demand
                   Labor Demand
                                  Factor demand for the firm is
    70                            the VMP curve that is
             VMP                  downward sloping.
    60
    50
    40
w




    30
    20
    10
    0
         0     2   4       6         8           10           12
                         Labor
      Market Factor Demand
• Suppose there are only 2 identical firms in
  the market.

• At w=10, one firm wants 9 workers, so two
  firms want 18 workers.
             Market Factor Demand
                    Labor Demand

    70
                           Firm Demand            Market Demand
    60
    50
                                         Market factor demand is the
    40                                   horizontal sum of each firm’s
w




                                         factor demand
    30
    20
    10
    0
         0      5     10            15                20             25
                            Labor
                REVIEW
• Firms use inputs until VMP = MFC.

• Demand for an input is decreasing in the
  MFC, e.g. demand for labor is decreasing
  in the wage rate.

• Market factor demand is the horizontal
  sum of firm demands.
     How many will you produce?
 L    TP    AP   MP   P   VMP   MFC
 0     0     0
 1     2     2    2   5    10   10
 2     8     4    6   5    30   10
 3    21     7   13   5    65   10
 4    32     8   11   5    55   10
 5    40     8    8   5    40   10
 6    45   7.5    5   5    25   10
 7    49     7    4   5    20   10
 8    52   6.5    3   5    15   10
 9    54     6    2   5    10   10
10    54   5.4    0   5     0   10
     How many will you produce?
 L    TP    AP   MP   P   VMP   MFC
 0     0     0
 1     2     2    2   5    10   10
 2     8     4    6   5    30   10
 3    21     7   13   5    65   10    54
 4    32     8   11   5    55   10
 5    40     8    8   5    40   10
 6    45   7.5    5   5    25   10
 7    49     7    4   5    20   10
 8    52   6.5    3   5    15   10
 9    54     6    2   5    10   10
10    54   5.4    0   5     0   10
     How much will you earn?
 L   TP   P   VMP MFC    VTP
 0    0
 1    2   5    10   10     10
 2    8   5    30   10     40
 3   21   5    65   10    105
 4   32   5    55   10    160
 5   40   5    40   10    200
 6   45   5    25   10    225
 7   49   5    20   10    245
 8   52   5    15   10    260
 9   54   5    10   10    270
10   54   5     0   10    270
     How much will you earn?
 L   TP   P   VMP MFC    VTP
 0    0
 1    2   5    10   10     10
 2    8   5    30   10     40
                                VTP: value
 3   21   5    65   10    105   of the total
 4   32   5    55   10    160   product
 5   40   5    40   10    200
 6   45   5    25   10    225
 7   49   5    20   10    245   54*5=270
 8   52   5    15   10    260
 9   54   5    10   10    270
10   54   5     0   10    270
How much did you spend on labor?
 L   TP   P   VMP MFC    VTP    TFC
 0    0
 1    2   5    10   10     10     10
 2    8   5    30   10     40     20
 3   21   5    65   10    105     30
 4   32   5    55   10    160     40
 5   40   5    40   10    200     50
 6   45   5    25   10    225     60
 7   49   5    20   10    245     70
 8   52   5    15   10    260     80
 9   54   5    10   10    270     90
10   54   5     0   10    270    100
How much did you spend on labor?
 L   TP   P   VMP MFC    VTP    TFC
 0    0
 1    2   5    10   10     10     10
 2    8   5    30   10     40     20
                                       TFC: total
 3   21   5    65   10    105     30   factor cost
 4   32   5    55   10    160     40
 5   40   5    40   10    200     50
 6   45   5    25   10    225     60
                                       9*10=90
 7   49   5    20   10    245     70
 8   52   5    15   10    260     80
 9   54   5    10   10    270     90
10   54   5     0   10    270    100
     How much did you earn net of
            labor costs?
 L   TP   P   VMP MFC    VTP    TFC
 0    0
 1    2   5    10   10     10     10     0
 2    8   5    30   10     40     20    20
 3   21   5    65   10    105     30    75
 4   32   5    55   10    160     40   120
 5   40   5    40   10    200     50   150
 6   45   5    25   10    225     60   165
 7   49   5    20   10    245     70   175
 8   52   5    15   10    260     80   180
 9   54   5    10   10    270     90   180
10   54   5     0   10    270    100   170
                         Profit
• If you didn’t have any other costs, then your profit would
  have been 180.

• This is one way to determine what a firm does at a
  particular price and wage.

• It is also very cumbersome to see the effect of a price
  change and thus not the best way to build the supply
  curve.

• But, it will be a useful base for using another method.
  Value and Costs of Texas Ag
• USDA NASS:
http://www.agcensus.usda.gov/Publications/
  2002/County_Profiles/Texas/index.asp
             Change in the wage
                   Labor Demand
                                  A change in the wage…
    70
    60       VMP
    50
    40
w




    30
    20
    10
    0
         0     2   4       6        8          10         12
                         Labor
     Change in quantity demanded
                   Labor Demand
                                  A change in the wage…
    70
             VMP                  …which cause a change in
    60
                                  the quantity demanded (9 to
    50                            7)
    40
w




    30
    20
    10
    0
         0     2   4       6        8           10              12
                         Labor
      Change in output price
• Suppose the value of your output falls to
  $2?
      Change in output price
• Suppose the value of your output falls to
  $2? L TP AP MP VMP MFC VMP`
        0    0     0
        1    2     2    2   10   10    4
        2    8     4    6   30   10   12
        3   21     7   13   65   10   26
        4   32     8   11   55   10   22
        5   40     8    8   40   10   16
        6   45   7.5    5   25   10   10
        7   49     7    4   20   10    8
        8   52   6.5    3   15   10    6
        9   54     6    2   10   10    4
       10   54   5.4    0    0   10    0
               Change in output price
                      Value of the Marginal Product

      70
               VMP
      60       VMP`
      50
      40
VMP




      30
      20
      10
      0
           0     2          4          6          8   10   12
                                     Labor
                Change in output price
                D        Demand for labor
                D`
       70
       60
       50
       40
wage




       30
       20
       10
       0
            0        2   4         6        8   10   12
                                 Labor
                Change in output price
                D        Demand for labor
                D`
                                                A change in the
       70                                       value of output
       60                                       changes the
                                                demand curve for
       50                                       labor
       40
wage




       30
       20
       10
       0
            0        2   4         6        8          10          12
                                 Labor
                Change in output price
                D        Demand for labor
                D`
                                                A change in the
       70                                       value of output
       60                                       changes the
                                                demand curve for
       50                                       labor…
       40
wage




                                                …which changes
       30
                                                the quantity
       20                                       demanded (9 to 6)
       10
       0
            0        2   4         6        8          10           12
                                 Labor

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:17
posted:2/23/2012
language:
pages:44