Econ101November5 - Econ 101 November 5 2007 Prepare for the...

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Econ 101 November 5, 2007 Prepare for the labor market equilibrium I. Factor Markets a. The factors of production are labor, capital, materials, energy, and other services b. Each factor has its own market c. The demand for factors is “derived” from the firms profit maximizing production d. The supply of factors depends upon their alternative uses II. Factor Demand a. A firms demand for labor/capital depends upon the wage rate W, price of capital R, and level of production Q b. Market demand for labor is the maximum amount that all firms in the market would purchase at the wage rate W (horizontal sum) c. Market demand for capital is the maximum amount that all firms in the market would purchase at the price of capital R (horizontal sum) d. Substitution of labor and capital i. The demand for labor and capital is derived by considering the substitution possibilities in production function at desired level of output ii. Curves are similar to utility curves- the farther out the better iii.
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