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Econ > Topic 16- Markets for Factors of Production > Flashcards

Topic 16- Markets for Factors of Production Flashcards

1
Q

Factors of Production

A

Land
labour
capital
enterprise

THESE ARE THE INPUTS

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2
Q

Purchase price

Rental price

A

Price paid to own the factor of production

price paid to use that factor of production temporarily

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3
Q

Labour services

A

Work efforts people supply to produce foods and services

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4
Q

Wage rate

A

price of labour services

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5
Q

Are labour markets competitive?

A

YES! many buyers and sellers

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6
Q

Capital?
What market are they sold in, what type of market is this

A

Tools instruments machines buildings

sold in the goods market, this is a rental market!

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7
Q

What is the wage rate determined by

A

SUPPLY AND DEMADN

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8
Q

Land services and natural resources

what market type?

A

Rental market, sold at the rental rate

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9
Q

What determines the prices of non-renewable natural resources?

A

Global commodity markets

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10
Q

Entreprenurship market?

A

DOES NOT EXIST!!!
Entrepreneurs receive the profit or
bear the loss that results from their
business decisions

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11
Q

Derived demand

A

The demand for a factor of production, it is DERIVED from teh demand for the goods the factor will produce!

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12
Q

Value of marginal product or the Marginal Revenue Product

A

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

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13
Q

How to calculate Value of MarginaL product

A

Same as the Marginal Revenue Product

PRICE X MARGINAL PRODUCT

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14
Q

How to calculate Marginal Revenue Product

A

SAME as Vale of Marginal product

PRICE X MARGINAL PRODUCT

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15
Q

How do you calculate marginal product

A

Total Product 2- Total Product 1/ Labour 2- Labour 1

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16
Q

What does VMP or MRP tell us?

A

How much is that extra worker/fop worth to a firm

THIS ISTHE EXTRA REVENUE THE FIRM EARNS BY HIRING ONE MORE WORKER

17
Q

What tells us how much an additional worker costs to a firm

A

Wage Rate

18
Q

What determines the total quantity of labour demanded by a firm

A

VMP and Wage rate together

19
Q

VMP and Wage rate relation

A

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

20
Q

How to calculate market demadn for labour

A

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!

21
Q

What shifts the market demand for labour

  1. the output price
    2.tech change
A
  1. 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)
  2. Tech change, new tech can create more demand for some labour, decrease it for others
22
Q

Factors that can shift market demand curve for labour
3. The price of others factors of prod
4. changes in # of firms

A
  1. if the price of using other capital decreases compared to wage rate, firms buy more capital and less labour!!!!!
  2. increases in # of firms, increases the demand for labour!
23
Q

How do individuals allocate their time?

A

Between working and leisure!!

24
Q

Reservation wage

A

is the lowest wage rate for which the individual is willing to supply labour

25
Q

What does the supply of labour curve look like!

A

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

26
Q

Why does the labour supply curve bend backwards?
1. substitution effect
2. income effect

A

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

27
Q

Income effect

A

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!!!

28
Q

Labour supply curve, where is there a substituion effect, and where is there a income effect

A

rates below the max hours possible, substitution, prices after Income (curve bends back)

29
Q

Individual labour supply curve vs market supply curve

A

Market supply curve is the horizontal sum of all individual supply curves SO it SLOPES UPWARDS NEVER BACKWARDS!

individuals supply curve bends backwards

30
Q

What sifts the market supply curve for labour

A
  1. changing population (Shift left)
  2. changing demographics (aging pop or women woopwoop)
  3. changes in alternatiove opps
31
Q

What does labour market equilibrium determine

A

the wage rate and the number of workers employed!!!

Wage eventually equals the value of the marginal product
W=VMP!

32
Q

What is the demand for land based on

A

the VMP of land

33
Q

THINK THIS THROUGH AYUSHI- WHAT SHIFTS THE MARKET DEMAND FOR LABOUR?????
WHAT DOES NOT?

A

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

34
Q

IMPORTANT THING TO REMEMBER ABOUT HTE VMP FORMULA

A

P X VMP
PRICE OF OUTPUTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT X VMP

Econ (20 decks)

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