chapter 1: markets for factors of production

Question 1

factors of production (def)

Answer 1

Factors of production are the inputs (other than intermediate goods) in the production process. We usually consider labour, physical capital, and land (when relevant)

Question 2

intermedieate goods:

Answer 2

are goods that are used for creating goods but disapair after use. EG. Labour,is a part of production, you need someone to triger the production

Question 3

The price of labour

Answer 3

is the wage (salary); it adjusts to balance demand and supply of labour

Question 4

The demand for labour

Answer 4

represents the volume of labour that

employers wish to hire at every possible wage level

Question 5

The supply of labour

Answer 5

represents the volume of labour that

potential workers wish to supply at every possible wage level

Question 6

derived demand

Answer 6

• is the distinctive feature of factor markets
• The demand for a commodity is a derived demand if it is determined by a supply decision in another market.

(is the demand that depends on something taking place in an other market )

Question 7

Law of Diminishing Returns

demand

Answer 7

Except possibly for small quantities of labour, the MPL (marginal product of labor) is decreasing

Question 8

The demand for labour equals

graph

Answer 8

• the VMPL (Value of the Marginal Product of Labor) curve when it is decreasing, zero otherwise

Question 9

Labour supply curve At the individual level:

Answer 9

The greater the wage, the greater the opportunity cost of leisure ➙ the less the worker wants leisure

Question 10

Labour supply curve at the market level:

Answer 10

The greater the wage, the greater the number of individuals willing to enter the labour force and supply labour at that wage

Question 11

If the wage is very high (curve?)

-> supply

Answer 11

it is possible that the labour supply curve becomes downward-sloping

☞ The wage is so high that the worker prefers to work less and enjoy leisure instead, even if it means earning less

Question 12

If the wage is very low (curve?)

-> supply

Answer 12

the labour supply curve might also become downward-sloping, but for a different reason

☞ The wage is so low that the worker has to work as much as possible to earn enough to survive

Question 13

The labour supply curve shifts in response to . . .

Answer 13

1 cultural changes and/or changes in tastes
2 changes in alternative opportunities
3 changes in the number of potential workers (immigration, epidemics . . . )

Question 14

Demand

-> Land and capital markets

Answer 14

Represents the value of the marginal product
of land/capital.

☞ Determined by the output price, availability
of other factors, technology . . .

Question 15

Supply

-> Land and capital markets

Answer 15

Results from a trade-off between alternative
uses for land/capital

☞ Importance of the opportunity cost of
land/capital
☞ Land supply is relatively inelastic

Question 16

Rental Price

Answer 16

Price paid to use a factor of production for a limited period

Question 17

Purchase Price

Answer 17

Price paid to own a factor of production indefinitely

Question 18

The equilibrium purchase price of a factor depends on

Answer 18

• the current value of its marginal product

- the value of its marginal product expected to prevail in the future