Ch17 - CIRCULAR FLOW MODEL BUSINESSES HOUSEHOLDS RESOURCE...

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Unformatted text preview: CIRCULAR FLOW MODEL BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCES INPUTS $ COSTS $ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENUE MR = MC MR = MC Chapter 17: Markets for Factors of Production Objectives How do firms choose the quantities of labor, capital, and natural resources to employ? How do people choose the quantities of labor, capital, and natural resources to supply? How are wages determined in competitive resource markets? Factor Prices and Incomes Factors of production are the resources used to produce goods and services. Factor prices determine incomes: Labor earns wages. Capital earns interest. Land earns rent. Entrepreneurship earns normal profit (and economic profit or loss) Factor Prices and Incomes Factors of production are traded in markets. The laws of demand and supply apply to a competitive factor market: the demand curve slopes downward and the supply curve slopes upward. There are no demand and supply curves for jobs. There are demand and supply curves for labor. Significance of Resource Pricing Money Income-Determination • wages, rent, interest & profits Resource Allocation (how much of each to use) Cost Minimization Policy Issues (income distr., taxes, minimum wage, subsidies) Factor Prices and Incomes The income earned by the owner of a factor of production equals the equilibrium price multiplied by the equilibrium quantity. Factor Prices and Incomes An increase in the demand for a factor of production raises its equilibrium price, increases its equilibrium quantity, and increases its income. 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 (?) . The effect of an increase in the supply of a factor of production on its income depends on the elasticity of demand (does the size of the income rectangle increase or decrease?). Labor Markets Labor markets (many) allocate labor, and the price of labor is the real wage rate (the wage rate adjusted for inflation). In 2002, labor earned 72 percent of total income in the United States. The average hourly wage rate was close to $25--$21 in wage or salary and $4 in benefits. Labor Markets Labor Markets Resource Demand is a Derived Demand Marginal Revenue Product (MRP) • Productivity • Diminishing Marginal Product (MP) • Product Price Marginal Revenue Product = Change in Total Revenue Unit Change in Resource Quantity Labor Markets Rule for Employing Resources: MRP = MRC Marginal Revenue Product = Marginal Resource Cost Marginal Resource Cost = Change in Total (Resource) Cost Unit change in Resource Quantity Units of Resource Total Product (Output) Marginal Product (MP) Product Price Total Revenue Marginal Revenue Product (MRP) 0 1 2 3 4 5 6 7 8 Q P 14 12 10 8 6 4 2 Resource price (wage rate) Quantity of resource demanded Pure Competition ] ] ] ] ] ] ] ] ] ] ] ] $2 $ Units of...
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Ch17 - CIRCULAR FLOW MODEL BUSINESSES HOUSEHOLDS RESOURCE...

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