Ten Principles of Economics - Part 41. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION 413 therefore the equilibrium rental price of ladders rises. Those owners who were lucky enough to avoid damage to their ladders now earn a higher return when they rent out their ladders to the firms that produce apples. Yet the effects of this event do not stop at the ladder market. Because there are fewer ladders with which to work the workers who pick apples have a smaller marginal product. Thus the reduction in the supply of ladders reduces the demand for the labor of apple pickers and this causes the equilibrium wage to fall. This story shows a general lesson An event that changes the supply of any factor of production can alter the earnings of all the factors. The change in earnings of any factor can be found by analyzing the impact of the event on the value of the marginal product of that factor. CASE STUDY THE ECONOMICS OF THE BLACK DEATH In fourteenth-century Europe the bubonic plague wiped out about one-third of the population within a few years. This event called the Black Death provides a grisly natural experiment to test the theory of factor markets that we have just developed. Consider the effects of the Black Death on those who were lucky enough to survive. What do you think happened to the wages earned by workers and the rents earned by landowners To answer this question let s examine the effects of a reduced population on the marginal product of labor and the marginal product of land. With a smaller supply of workers the marginal product of labor rises. This is simply diminishing marginal product working in reverse. Thus we would expect the Black Death to raise wages. Because land and labor are used together in production a smaller supply of workers also affects the market for land the other major factor of production in medieval Europe. With fewer workers available to farm the land an additional unit of land produced less additional output. In other words the marginal product of land fell. Thus
