How would you determine the demand for a factor of production? What factors infl

Question

How would you determine the demand for a factor of production?

What factors influence the supply and demand for labor? Examine how those factors impact market demand for labor.

How do labor unions try to increase the demand for labor? What has made labor unions such an integral part of the workforce?

What is the difference between the rates of return for a renewable and nonrenewable resource? How do the rates of return on capital and land differ between a renewable and nonrenewable resource?

How does the growing demand for food, fuel, and export affect the market for land?

Explanation / Answer

Determination of the demand for a factor of production

Consider a firm hires labor from a perfectly competitive market and sells its output also in a perfectly competitive market. Since the labor market is competive, the wage rate is given. And since the product market is also competitive, the price of the product of also given.

The law of diminishing marginal returns implies that as more and more labor is employed, the marginal product of labor decreases. Suppose the marginal product of labor data is as follows.

If the price of the product is $2, then we can calculate the value of marginal product of labor by simply multiplying the the marginal product of labor by $2. So the value of marginal product of labor is:

which may be depicted as follows:

Suppose the wage rate is $130, then:

As long as the wage rate is below the value of marginal product of labor, the firm will hire labor as doing so will fectch profit to the firm. So in the above case, the firm will hire 3 units of labor.

So the firm hires that quantity of labor at which the value of marginal product of labor equal to the wage rate. This makes the value of marginal product of labor the labor demand curve.

Factors that influence the demand for labor:

Since the labor demand curve is nothing but the value of marginal product of labor curve, whatever affects the value of marginal product of labor affects the demand for labor.

If the worker's productivity rises, the marginal product of labor, this means the value of marginal product of labor also rises. That is, when the worker's productivity rises, the demand curve shifts out. Similarly, as the capital stock rises, the marginal product of labor rises, the value of marginal product of labor rises, the demand curve for labor shifts out. Another determinant is the supply and demand of the output. As the demand for the output rises, the price of the output rises, this makes the value of marginal product of labor, which means the labor demand rises.

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