Topic 16- Markets for Factors of Production Flashcards
Factors of Production
Land
labour
capital
enterprise
THESE ARE THE INPUTS
Purchase price
Rental price
Price paid to own the factor of production
price paid to use that factor of production temporarily
Labour services
Work efforts people supply to produce foods and services
Wage rate
price of labour services
Are labour markets competitive?
YES! many buyers and sellers
Capital?
What market are they sold in, what type of market is this
Tools instruments machines buildings
sold in the goods market, this is a rental market!
What is the wage rate determined by
SUPPLY AND DEMADN
Land services and natural resources
what market type?
Rental market, sold at the rental rate
What determines the prices of non-renewable natural resources?
Global commodity markets
Entreprenurship market?
DOES NOT EXIST!!!
Entrepreneurs receive the profit or
bear the loss that results from their
business decisions
Derived demand
The demand for a factor of production, it is DERIVED from teh demand for the goods the factor will produce!
Value of marginal product or the Marginal Revenue Product
The VALUE a firm has of hiring one more unit of factor of production (land labour capital)
VMP=Price x Marginal Product
MRP= Price x Marginal Product
How to calculate Value of MarginaL product
Same as the Marginal Revenue Product
PRICE X MARGINAL PRODUCT
How to calculate Marginal Revenue Product
SAME as Vale of Marginal product
PRICE X MARGINAL PRODUCT
How do you calculate marginal product
Total Product 2- Total Product 1/ Labour 2- Labour 1
What does VMP or MRP tell us?
How much is that extra worker/fop worth to a firm
THIS ISTHE EXTRA REVENUE THE FIRM EARNS BY HIRING ONE MORE WORKER
What tells us how much an additional worker costs to a firm
Wage Rate
What determines the total quantity of labour demanded by a firm
VMP and Wage rate together
VMP and Wage rate relation
VMP=Wage rate, firm has maximized profit
VMP> Wage rage, firm should add one more worker and increase profit
VMP<Wage rate, firm should fire one more worker
How to calculate market demadn for labour
obtained by summing the quantities of labour demanded by all firms at each wage rate!!!
bc each firms demadn curve slopes downard, so does the market demand curve!
What shifts the market demand for labour
- the output price
2.tech change
- the output price, if the output price of a good increases, the value of one more marginal product of that good increases, which creates MORE DEAMND (Shift right)
- Tech change, new tech can create more demand for some labour, decrease it for others
Factors that can shift market demand curve for labour
3. The price of others factors of prod
4. changes in # of firms
- if the price of using other capital decreases compared to wage rate, firms buy more capital and less labour!!!!!
- increases in # of firms, increases the demand for labour!
How do individuals allocate their time?
Between working and leisure!!
Reservation wage
is the lowest wage rate for which the individual is willing to supply labour
What does the supply of labour curve look like!
Like a backwards c,
first it increases past the reservation wage, but as the wage rate keeps increasing it bends backwards because you pass the indviduals max possibel hours of work
Why does the labour supply curve bend backwards?
1. substitution effect
2. income effect
At wage rate BELOW max hours of work wanted, the higher the wage, the more quantity of labour
sub effect describes how an individual responds to the increasing opp cost of leisure,
AT LOW WAGE RATES: sub effect dominates income effect, so a rise in the wage rate increases the quantity of labour
Income effect
Past the max hours of work possible point, the income effect dominates the substitution effect, and curve bends backwards
as income increases, consumers buy more of most goods- MORE OF LEISURE WHICH IS A NORMAL GOOD!!!
Labour supply curve, where is there a substituion effect, and where is there a income effect
rates below the max hours possible, substitution, prices after Income (curve bends back)
Individual labour supply curve vs market supply curve
Market supply curve is the horizontal sum of all individual supply curves SO it SLOPES UPWARDS NEVER BACKWARDS!
individuals supply curve bends backwards
What sifts the market supply curve for labour
- changing population (Shift left)
- changing demographics (aging pop or women woopwoop)
- changes in alternatiove opps
What does labour market equilibrium determine
the wage rate and the number of workers employed!!!
Wage eventually equals the value of the marginal product
W=VMP!
What is the demand for land based on
the VMP of land
THINK THIS THROUGH AYUSHI- WHAT SHIFTS THE MARKET DEMAND FOR LABOUR?????
WHAT DOES NOT?
The formula for VMP is
VMP=Px MP
So if price of output changes or if the marginal product of labour changes ofc VMP WILL CHANGE
but a change in the wage rate DOES NOT CHANGE THE VMP!!!!!!!! BC VMP must be EQUAL to the WAGE RATE
IMPORTANT THING TO REMEMBER ABOUT HTE VMP FORMULA
P X VMP
PRICE OF OUTPUTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT X VMP
