The Markets for the Factors of Production

factors of production

the inputs used to produce goods and services

examples of factors of production

labor, land, and capital

capital

the equipment and structures used to produce goods and services

determined by supply and demand in factors markets

prices and quantities of inputs

derived demand

derived from a firm's decision to supply a good in another market

assumptions made for factors of production

1. we assume all markets are competitive.
2. we assume that firms care only about maximizing profits

difference between markets for goods and services and markets of factors of production

derived demand

example of derived demand

how many workers and sewing machines fro a sweater company depends on how many sweaters they are producing

the typical firm is a price taker in...

the market for the product it produces

each firm's supply of output and demand for inputs are derived from this goal

maximizing profits

you maximize profits by...

thinking at the margin

cost of hiring another worker

the wage - the price of labor

when firms produce at the profit maximization point...

economic profit is 0 and accounting profit is positive

accounting profit does not include this...

implicit costs

implicit costs

indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur

production function

the relationship between the quantity of inputs used to make a good and the quantity of output of that good

marginal product of labor

the increase in the amount of output from an additional unit of labor

marginal product of labor formula

MPL = change in quantity/ change in labor

value of the marginal product

the marginal product of an input times the price of the output

value of marginal product formula

VMPL = P x MPL

for any competitive, profit-maximizing firm:

1. to maximize profits, hire workers up to the point where VMPL = W
2. the VMPL curve is the labor demand curve

things that shift the labor demand curve

1. changes in the output price, P
2. technological change (affects MPL)
3. the supply of other factors (affects MPL)

example of a shift in the labor demand curve

if firm gets more equipment (capital), then workers will be more productive

marginal cost

costof producing an additional unit of output

marginal cost formula for worker

MC = W/MPL

connection between input demand and output supply

to produce additional output, hire more labor
-as L rises, MPL falls...
-causing W/MPL to rise...
-causing MC to rise

as marginal product decreases, marginal costs...

increases

competitive firm's rule for demanding labor

P x MPL = W

value of the marginal product of labor is the same as...

marginal revenue product

value of the marginal product cost is the same as...

the marginal revenue cost

output supply determines...

input demand

purchase price

the price a person pays to own that factory indefinitely

rental price

the price a person pays to use that factor for a limited period of time

wage is a ____ price of ____

rental, labor

how the rental price of capital is determined

by comparing the price with the value if the marginal product of capital

rental income in any period equals...

the value of the marginal product

neoclassical theory of income distribution

states that...
-factor prices determined by supply and demand
-each factor is paid the value of its marginal product
most economists use theory a starting point for understanding the distribution of income

compensating differential

a difference in wages that arises to offset the nonmonetary characteristics of different jobs

nonmonetary characteristics

unpleasantness, difficulty, safety

example of a compensating differential job

coal miners and fire fighters due to the risk; night shift workers to compensate for the lifestyle disruption of working at night

human capital

the accumulation of investments in people, such as education and on-the-job training

human capital affects...

productivity, thus labor demand and wages

international trade

rising exports of goods made with skilled labor, rising imports of goods made with unskilled labor

skill-biased technological change

new technologies have increased the demand for skilled workers, reduced demand for unskilled workers

union

a worker association that bargains with a company

efficiency wages

above-equilibrium wages paid by firms to increase worker productivity

discrimination

the offering of different opportunities to similar individuals who differ only by race, ethnicity, gender, or other personal characteristics

poverty line

an absolute level of income set bythe govenrment for each family size below which a family is deemed to be in poverty

poverty rate

the percentage of the population whose family income falls below the poverty line

welfare

government programs that supplement the incomes of the needy

negative income tax

a tax system that collects revenue from high-income households and gives transfers to low-income households

moral hazard

the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior

agent

a person who is performing a task on someone else's behalf

principal

the person for whom this action is being performed

efficiency wages

to increase the penalty for being caught shirking