Worth: Mankiw Economics 5e 50 PART 11 Classical Theory: The Economy in the Long Ru We can now answer the question we asked at the beginning of this section ow much labor does the firm hire? The firms manager knows that if the extra revenue P X MPL exceeds the wage W, an extra unit of labor increases profit. Therefore, the manager continues to hire labor until the next unit would no onger be profitable--that is, until the MPL falls to the point where the extra revenue equals the wage. The firms demand for labor is determined by P×MPL=W We can also write this MPL=W/P W/Pis the real wage-the payment to labor measured in units of output rather than in dollars. To maximize profit, the firm hires up to the point at which the marginal product of labor equals the real wage. For example, again consider a bakery. Suppose the price of bread P is $2 per loaf, and a worker earns a wage W of $20 per hour. The real wage W/P is 10 loaves per hour. In this example, the firm keeps hiring workers as long as each additional worker would produce at least 10 loaves per hour. When the MPL falls to 10 loaves per hour or less, hiring additional workers is no longer profitable. Figure 3-4 shows how the marginal product of labor depends on the amount of labor employed (holding the firms capital stock constant). That is, this figure graphs the MPL schedule. Because the MPL diminishes as the amount of labor increases, this curve slopes downward. For any given real wage, the firm hires up to the point at which the MPL equals the real wage. Hence, the MPL schedule is also the firm's labor demand curve figure 3-4 Units of output The Marginal Product of Labor Schedule The mar- ginal product of labor MPL depends on the amount of labor. The MPL curve slopes downward because the mPl declines as L increases. The rm hires labor up to the oint where the real wage N/P equals the MPL. Hence this schedule is also the irm's labor demand curve MPL, Labor demand Units of labor. L Quantity of labor User JOENA: Job EFF01419: 6264_ch03: Pg 50: 24986#/eps at 1009 Ill wed,Feb13,20028:564M
User JOEWA:Job EFF01419:6264_ch03:Pg 50:24986#/eps at 100% *24986* Wed, Feb 13, 2002 8:56 AM We can now answer the question we asked at the beginning of this section: How much labor does the firm hire? The firm’s manager knows that if the extra revenue P × MPL exceeds the wage W, an extra unit of labor increases profit. Therefore, the manager continues to hire labor until the next unit would no longer be profitable—that is, until the MPL falls to the point where the extra revenue equals the wage.The firm’s demand for labor is determined by P × MPL = W. We can also write this as MPL = W/P. W/P is the real wage—the payment to labor measured in units of output rather than in dollars.To maximize profit, the firm hires up to the point at which the marginal product of labor equals the real wage. For example, again consider a bakery. Suppose the price of bread P is $2 per loaf, and a worker earns a wage W of $20 per hour.The real wage W/P is 10 loaves per hour. In this example, the firm keeps hiring workers as long as each additional worker would produce at least 10 loaves per hour.When the MPL falls to 10 loaves per hour or less, hiring additional workers is no longer profitable. Figure 3-4 shows how the marginal product of labor depends on the amount of labor employed (holding the firm’s capital stock constant).That is, this figure graphs the MPL schedule. Because the MPL diminishes as the amount of labor increases, this curve slopes downward. For any given real wage, the firm hires up to the point at which the MPL equals the real wage. Hence, the MPL schedule is also the firm’s labor demand curve. 50 | PART II Classical Theory: The Economy in the Long Run figure 3-4 Units of labor, L MPL, Labor demand Units of output Quantity of labor demanded Real wage The Marginal Product of Labor Schedule The marginal product of labor MPL depends on the amount of labor. The MPL curve slopes downward because the MPL declines as L increases. The firm hires labor up to the point where the real wage W/P equals the MPL. Hence, this schedule is also the firm’s labor demand curve
Worth: Mankiw Economics 5e CHAPTER 3 National Income: Where It Comes From and Where It Goes 51 The Marginal Product of Capital and Capital Demand The firm decides how much capital to rent in the same way it decides how much labor to hire The marginal product of capital (MPK) is the amount of extra output the firm gets from an extra unit of capital, holding the amount of labor constant MPK=F(K+1, L)-F(K, L) Thus, the marginal product of capital is the difference between the amount of tput produced with K+ 1 units of capital and that produced with only Kunits of capital. Like labor, capital is subject to diminishing marginal produ The increase in profit from renting an additional machine is the extra revenue from selling the output of that machine minus the machine's rental price: △ Profit=△ Revenue-△Cost =(P×MPK)-R To maximize profit, the firm continues to rent more capital until the MPK falls to equal the real rental price MPK= R/P The real rental price of capital is the rental price measured in units of good rather than in dollars To sum up, the competitive, profit-maximizing firm follows a simple rule about how much labor to hire and how much capital to rent. The firm demands each factor of production until that factor's marginal product falls to equal its real factor price The Division of national income aving analyzed how a firm decides how much of each factor to employ, we can now explain how the markets for the factors of production distribute the econ- omy's total income. If all firms in the economy are competitive and profit maxi- lizing, then each factor of production is paid its marginal contribution to the production process. The real wage paid to each worker equals the MPL, and the eal rental price paid to each owner of capital equals the MPK. The total real wages paid to labor are therefore MPL X L, and the total real return paid to cap- ital owners iS MPKxK the economic profit of the owners of the firms. Real economic profit /f on is The income that remains after the firms have paid the factors of produc Economic Profit=Y-(MPL X L)-(MPKXK) Because we want to examine the distribution of national income,we rearrange the terms as follows, Y=(MPL X L)+(MPK X K)+ Economic Profit Total income is divided among the return to labor, the return to capital, and eco- User JOENA: Job EFF01419: 6264_ch03: Pg 51: 24987#/eps at 1009 I wed,Feb13,20028:564M
User JOEWA:Job EFF01419:6264_ch03:Pg 51:24987#/eps at 100% *24987* Wed, Feb 13, 2002 8:56 AM The Marginal Product of Capital and Capital Demand The firm decides how much capital to rent in the same way it decides how much labor to hire.The marginal product of capital (MPK ) is the amount of extra output the firm gets from an extra unit of capital, holding the amount of labor constant: MPK = F(K + 1, L) − F(K, L). Thus, the marginal product of capital is the difference between the amount of output produced with K + 1 units of capital and that produced with only K units of capital. Like labor, capital is subject to diminishing marginal product. The increase in profit from renting an additional machine is the extra revenue from selling the output of that machine minus the machine’s rental price: DProfit = DRevenue − DCost = (P × MPK) − R. To maximize profit, the firm continues to rent more capital until the MPK falls to equal the real rental price: MPK = R/P. The real rental price of capital is the rental price measured in units of goods rather than in dollars. To sum up,the competitive,profit-maximizing firm follows a simple rule about how much labor to hire and how much capital to rent.The firm demands each factor of production until that factor’s marginal product falls to equal its real factor price. The Division of National Income Having analyzed how a firm decides how much of each factor to employ, we can now explain how the markets for the factors of production distribute the economy’s total income. If all firms in the economy are competitive and profit maximizing, then each factor of production is paid its marginal contribution to the production process.The real wage paid to each worker equals the MPL, and the real rental price paid to each owner of capital equals the MPK. The total real wages paid to labor are therefore MPL × L, and the total real return paid to capital owners is MPK × K. The income that remains after the firms have paid the factors of production is the economic profit of the owners of the firms. Real economic profit is Economic Profit = Y − (MPL × L) − (MPK × K ). Because we want to examine the distribution of national income, we rearrange the terms as follows: Y = (MPL × L) + (MPK × K ) + Economic Profit. Total income is divided among the return to labor, the return to capital, and economic profit. CHAPTER 3 National Income: Where It Comes From and Where It Goes | 51