Unit 18: The Markets for the Factors of Production
The same supply-and-demand machinery, run on labor, land, and capital — where a wage or a rent comes from the value of what an extra worker or acre produces.
4 topics · 12 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
The Derived Demand for Labor
- How it worksHow does the demand for labor come from the demand for the goods that labor helps produce, making it a derived demand?
- Common mistakeWhy doesn't a firm's demand for labor exist independently of what that labor is producing?
- Worked exampleFind the effect on a car factory's labor demand if consumer demand for its cars falls by 30 percent.
Your turn1 of 2
A car factory currently employs 339 workers. If consumer demand for its cars falls by 26 percent and labor demand falls proportionally, how many workers would it employ afterward?Marginal Product of Labor and the Value of the Marginal Product
- How it worksHow does multiplying the marginal product of labor by the price of the good give the value of the marginal product, the basis for the wage?
- Worked exampleFind the value of the marginal product of the 5th worker who adds 20 bushels of apples that sell for 2 dollars each.
- Common mistakeWhy doesn't diminishing marginal product mean a firm's later workers are somehow worse workers than its earlier ones?
Your turn1 of 2
Find the value of the marginal product of a worker who adds 24 units of output that sell for 7 dollars each.The Labor Demand Curve and the Labor Supply Curve
- How it worksHow does a competitive firm's demand for labor come directly from its value-of-marginal-product curve, while workers' labor supply reflects a trade-off with leisure?
- Worked exampleFind the wage and quantity of labor hired where a labor demand curve of wage equals 40 minus quantity meets a labor supply curve of wage equals quantity.
- Common mistakeWhy doesn't a rising wage always pull more hours of labor supply out of every single worker?
Your turn1 of 2
Find the wage where a labor demand curve of wage equals 51 minus quantity meets a labor supply curve of wage equals 1.47 times quantity.The Markets for Capital and Land
- How it worksHow does the same value-of-marginal-product logic that sets wages also set the rental price of land and capital?
- Common mistakeWhy isn't land's price set any differently in principle just because its supply happens to be fixed?
- Ties togetherHow do wages, rents, and the return on capital all trace back to the same marginal-productivity theory of factor pricing?
Your turn1 of 2
A unit of capital has a marginal product of 16 units, sold at 9 dollars each. Using the same value-of-marginal-product logic that sets wages, what rental price would this unit of capital command?