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