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Unformatted text preview: C h a p t e r 1 7 : M a r k e t s f o r F a c t o r s o f P r o d u c t i o n I. Factor Prices and Incomes A. Goods and services are produced using the four factors of production: Labor, capital, land, and entrepreneurship (as defined in Chapter 1). 1. Factors of production are the resources used to produce goods and services. 2. These factors of production earn a income for their owners called factor prices : a) Labor earns a wage rate. b) Capital earns interest. c) Land earns rent. d) Entrepreneurship earns normal profit. e) Economic profit (or economic loss) is paid to (or borne by) the owner of the firm. B. Factors of production are traded in markets where their prices and quantities are determined by the market forces of demand and supply. 1. Firms demand factors of production. Factor demand curves are downward sloping. The demand for a factor of production is called the derived demand , because it is derived from the demand for the goods and services produced by the factor. 2. Households supply factors of production. Factor supply curves are (generally) upward sloping. C. Figure 17.1 shows a factor market, and its equilibrium factor price and quantity. 1. An increase in the demand for a factor of production raises its equilibrium price, increases its equilibrium quantity, and increases its income. 2. An increase in the supply of a factor of production lowers its equilibrium price, increases its equilibrium quantity, and has an ambiguous effect on its income. 3. The income earned by the owners of a factor of production equals the factor price, PF in the figure, multiplied by the equilibrium quantity, QF in the figure. a) The effect of an increase in the supply of a factor of production on its income depends on the elasticity of demand. b) If the demand is elastic, an increase in supply increases income. If the demand is inelastic, an increase in supply decreases income. II. Labor Markets A. Labor markets allocate labor and the price of labor is the wage rate. 1. In 2002, the United States, labor income accounted for 72 percent of total income earned. 2. The average wage was approximately $25 per hour, but that figure hides a large diversity of wages across the population. 3. Figure 17.2 shows the differences in wage rates across various jobs in the United States. B. A firm’s demand for labor is a derived demand—a demand for a factor of production that is derived from the demand for the goods or services produced by the factor. 1. Recall that the in the output market firm chooses to produce the quantity of output where marginal revenue equals marginal cost. 2. In the input market, the firm compares the marginal revenue produced by hiring one more worker unit with the marginal cost of hiring that worker....
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This note was uploaded on 04/03/2009 for the course ECON 2102 taught by Professor Bill during the Fall '08 term at Temple.
- Fall '08