Chapter 18: The Markets for the Factors of Production Flashcards
Define ‘Factors of production’.
The inputs used to produce goods and services.
Define ‘Production function’.
The relationship between the quantity of inputs used to make a good and the quantity of output of that good.
Define ‘Marginal product of labour’.
The increase in the amount of output from an additional unit of labour.
Define ‘Diminishing marginal product’.
The property whereby the marginal product of an input declines as the quantity of the input increases.
Define ‘Value of the marginal product’.
The marginal product of an input times the price of the output.
Define ‘Capital’.
The equipment and structures used to produce goods and services.
The economy’s income is distributed in the markets for the factors of production. What are the 3 most important factors of production?
Land, labour and capital.
The demand for factors, such as labour, is a ___ demand that comes from firms that use the factors to produce goods and services.
Derived.
Competitive, profit-maximizing firms hire each factor up to the point at which …?
The value of the marginal product of the factor equals its price.
VMP = P
The supply of labour arises from individuals’ tradeoff between work and leisure. An upward-sloping labour supply curve means that people respond to an increase in the wage by enjoying less leisure and working more hours. What are the two possible tradeoffs?
The income effect: Less work and more leisure.
The substitution effect: More work and less leisure.
The price paid to each factor adjusts to balance the supply and demand for that factor. Because factor demand reflects …?, in equilibrium, each factor is compensated according to its marginal contributions to the production of goods and services.
The VMP of that factor.
What are some ways that a labour demand curve can shift? Labour supply curve?
Labour demand curve shift: Output price, Technological change, and Supply of other factors
Labour supply curve: Changes in tastes, Changes in alternative opportunities, and Immigration.
Since factors of production are used together, do the marginal product of any one factor depend on the quantities of all factories that are available?
Yes.
As a result, a change in the supply of one factor alters the equilibrium earnings of all factors.
The value of the marginal product column is sometimes also called…?
The firm’s marginal revenue product: It is the extra revenue the firm gets from hiring an additional unit of a factor of production.
What represents the labour demand curve for a competitive, profit-maximizing firm?
The value-of-marginal-product curve.
