Summary of chapter 18 of Gregory Mankiw’s Principles of Economics, 5th Edition
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Here’s a summary of Chapter 18:
Key Concepts in Chapter 18
1. Factors of Production & Derived Demand
The main inputs—labor, land, and capital—are essential to producing goods and services.
The demand for these factors is derived: firms demand them not for their own sake, but because they contribute to producing outputs that can be sold.
2. Labor Demand
Considering the firms operate under perfect competition model:
They take wages and output prices as given.
They base hiring decisions on the Value of the Marginal Product of Labor (VMPL), which is equal to the marginal product of labor (MPL) multiplied by the output product price.
Firms employ labor up to the point where VMPL = wage, maximizing profit.
3. Shifts in Labor Demand
Labor demand curves shift due to:
Changes in output prices, higher product prices increase VMPL.
Technological improvements, boost MPL and thus demand for labor.
Changes in the supply of other production factors, which affect productivity.
4. Labor Supply
Workers face a trade-off between labor and leisure: higher wages increase the opportunity cost of leisure, encouraging more work.
Factors that shift labor supply include:
Tastes or preferences toward working.
Alternative job opportunities.
Immigration, which increases total labor supply.
5. Labor Market Equilibrium
Equilibrium requires wage = VMPL, balancing labor supply and demand.
Shifts in either curve change both wages and employment levels.
Because of diminishing productivity, equilibrium outcomes adjust accordingly.
6. Productivity and Wages
A nation’s standard of living depends on productivity—the more each worker produces, the higher potential wages.
Historically in the U.S., real wages and productivity have grown in tandem, both around 2% per year from 1959 to 2012.
7. Land & Capital Markets
Like labor, land and capital are paid based on their marginal productivity.
The rental price reflects the marginal value of use for a period, while purchase price relates to owning the asset permanently.
Changes in supply of one factor affect earnings of others, due to their interdependence.
8. Historical Context – The Black Death
As an illustrative case, the Black Death dramatically reduced labor supply in 14th-century Europe, raising wages for survivors.
This supports the principle that scarcity raises marginal product and thus factor earnings.
Summary Table
Topic >> Core Insight
Derived Demand > Firms demand factors because they generate profitable output
Labor Market > Firms hire until VMPL equals wage; supply and demand determine equilibrium
Productivity & Wages > Higher productivity drives higher wages—a key to living standards
Land & Capital > Paid according to marginal product; rental vs purchase price matters
Historical Example > Labor scarcity (Black Death) illustrates factor price dynamics
… …
interdependence of factors of production
seisan yōso no sōgoizon
生産要素の相互依存
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