econ ch 12 outline - Kristin Chen Econ CH 12-Factor Markets...

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Kristin Chen 1. The Economy’s Factors of Production a. Factor of production i. Divided into 4 classes: land, labor, physical capital, human capital ii. Physical capital = “capital” manufactured resources such as buildings and machines iii. Human capital = improvement in labor created by education and knowledge that is embodied in the workforce b. Factor prices matter because of the allocation of resources i. Derived demand – demand for the factor is derived from the firm’s output choice ii. Factor markets are where most people get the largest shares of their income c. i. Factor distribution of income = how the total income of the economy is divided among 1. Determined by factor prices (set in factor markets) 2. Labor receives over 70% of the income in the modern US economy 3. Compensation of employees = return to human capital 2. a. Value of the marginal product of labor (VMPL) = value of the additional output generated by employing one more unit of that factor i. VMPL = P x MPL ii. MPL = marginal product of labor (benefit; value of the extra output that comes from employing 1 more unit of labor)
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econ ch 12 outline - Kristin Chen Econ CH 12-Factor Markets...

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