Factor Markets ‹ 147
There are three possibilities where the MPLis one-half the size of MPK:
- L =1, K =1. Total Product = 50 + 100 = 150
- L =2, K =3. Total Product =(50 +40) +(100 + 90 +80) = 360
- L =3, K =4. Total Product =(50 + 40 +30) +(100 + 90 + 80 +60) = 450
The best way to produce 360 gadgets is to hire two units of labor and three units of
capital at a total cost of TC =$5 ¥ 2 +$10 ¥ 3 =$40. The same problem could have been
modified to use a cost constraint rather than an output constraint.
Told that you can only spend $40, find the combination of labor and capital that maxi-
mizes production. Of course, the solution is again L=2, K=3, and output is 360 gadgets.
10.3 Factor Supply and Market Equilibrium
Main Topics: Supply of Labor, Wage and Employment Determination, What About Other Resources?
If you have ever had a job, you have been a small part of the labor supply curve. We quickly
investigate labor supply and combine it with labor demand to complete a labor market. It
is in this competitive market that wage and employment are determined.
Supply of Labor
Economic theory predicts that as the price of a good increases, suppliers of that good
increase the quantity supplied. This is the law of supply. If the price of labor (wage)
increases, more hours of labor should be supplied. For the most part, this is true, and the
market labor supply curve slopes upward. If the hourly wage increased from $5 to $8, most
people respond by working more hours, earning more income ($320 per 40-hour work-
week), and consuming more goods.
Wage and Employment Determination
Assuming competitive output and input markets, the competitive wage is found at the
intersection of labor demand and labor supply. Changing demand and supply influence this
wage, and the equilibrium quantity of labor that accompanies it.
Example:
The aging population in the United States is giving a boost to the market for
nurses. An increase in the demand for nurses increases both the wage and
employment of nurses. This is seen in the Figure 10.3.
$ S
Quantity Nurses
D2005
D1995
W 1995
W 2005
Figure 10.3
