The Specific Factors Model Figure 3-2: The Marginal Product of Labor Marginal product of labor, MPLM MPL abor input, L Copyright C 2003 Pearson Education, Inc Slide 3-11
Copyright © 2003 Pearson Education, Inc. Slide 3-11 MPLM Figure 3-2: The Marginal Product of Labor The Specific Factors Model Labor input, LM Marginal product of labor, MPLM
The Specific Factors Model Figure 3-3: The Production Possibility Frontier in the Specific Factors Model Output of food Production function Q( increasing个) conomy production for food possibility frontier (Pp) 1 QF=QK, LF) Labor input in L Output of food,LF manufactures, QM Increasing←) (increasing > + 2 Production function Economy's allocation L for manufactures of labor (AA) Labor input QM=QMK, Lm) in manufactures Copyright C 2003 Pearson Education, Inc M(increasing v) Slide 3-12
Copyright © 2003 Pearson Education, Inc. Slide 3-12 QF =QF (K, LF ) QM =QM(K, LM) L2 M L2 F 3 2 1 AA 1' 3' PP Economy’s production possibility frontier (PP) Production function for manufactures Economy’s allocation of labor (AA) Production function for food Q2 F Q2 M 2' Labor input in food, LF (increasing ) Output of manufactures, QM (increasing →) Labor input in manufactures, LM (increasing ) Output of food, QF (increasing ) Figure 3-3: The Production Possibility Frontier in the Specific Factors Model The Specific Factors Model
The Specific Factors Model Prices, Wages, and Labor Allocation How much labor will be employed in each sector To answer the above question we need to look at supply and demand in the labor market Demand for labor In each sector, profit-maximizing employers will demand labor up to the point where the value produced by an additional person-hour equals the cost of employing that hour Copyright C 2003 Pearson Education, Inc Slide 3-13
Copyright © 2003 Pearson Education, Inc. Slide 3-13 ▪ Prices, Wages, and Labor Allocation • How much labor will be employed in each sector? – To answer the above question we need to look at supply and demand in the labor market. • Demand for labor: – In each sector, profit-maximizing employers will demand labor up to the point where the value produced by an additional person-hour equals the cost of employing that hour. The Specific Factors Model
The Specific Factors Model The demand curve for labor in the manufacturing sector can be written MPLMX PM=w (3-4) The wage equals the value of the marginal product of labor in manufacturing The demand curve for labor in the food sector can be written MPLE X PF=w (3-5) The wage rate equals the value of the marginal product of labor in food Copyright C 2003 Pearson Education, Inc Slide 3-14
Copyright © 2003 Pearson Education, Inc. Slide 3-14 • The demand curve for labor in the manufacturing sector can be written: MPLM x PM = w (3-4) – The wage equals the value of the marginal product of labor in manufacturing. • The demand curve for labor in the food sector can be written: MPLF x PF = w (3-5) – The wage rate equals the value of the marginal product of labor in food. The Specific Factors Model
The Specific Factors Model The wage rate must be the same in both sectors because of the assumption that labor is freely mobile between sectors The wage rate is determined by the requirement that total labor demand equal total labor supply LM+ LF=L (3-6) Copyright C 2003 Pearson Education, Inc lide 3-15
Copyright © 2003 Pearson Education, Inc. Slide 3-15 ▪ The wage rate must be the same in both sectors, because of the assumption that labor is freely mobile between sectors. ▪ The wage rate is determined by the requirement that total labor demand equal total labor supply: LM + LF = L (3-6) The Specific Factors Model