Ch17 - CHAPTER 1 7 Markets for Factors of Production After...

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Markets for Factors of Production CHAPTER 17
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After studying this chapter you will be able to Explain the link between a factor price and factor income Explain what determines demand, supply, the wage rate, and employment in a competitive labor market Explain why wage rates can be higher or lower than those in a competitive labor market Explain what determines demand, supply, the interest rate, saving, and investment in the capital market Explain what determines demand, supply, price, and the rate of use of a nonrenewable resource Explain the concept of economic rent and distinguish between economic rent and opportunity cost
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Many Happy Returns Some people make very happy returns, like Katie Couric’s $15 million a year. Why aren’t all jobs well paid? What determines wage rates? What determines the returns to other factors of production?
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Factor Prices and Incomes Goods and services are produced using factors of production—labor, capital, land, and entrepreneurship. Factor incomes are: Wages earned by labor. Interest earned by capital. Rent earned by land. Normal profit earned by entrepreneurship. Economic profit (loss) is paid to (borne by) the firm’s owners, who might be the entrepreneur or the stockholders.
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Factor Prices and Incomes Factors of production are traded in markets. Demand and supply is the main tool used to understand a competitive factor market. Firms demand factors of production, and households supply them. The demand for a factor of production is a derived demand because it is derived from the demand for the goods and services produced by the factor.
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Factor Prices and Incomes Figure 17.1 shows a factor market. The income earned by the owner of a factor of production equals the equilibrium factor price multiplied by the equilibrium factor quantity.
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Factor Prices and Incomes A change in demand or supply changes the equilibrium price, quantity, and income. 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.
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Labor Markets Labor markets 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, of which $21 was paid as a wage or salary and $4 was paid as supplementary benefits. Figure 17.2 on the next slide shows a sample of earnings levels in the United States in 2002.
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In 2002, the national wage rate was $21 an hour. Most jobs pay a
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Ch17 - CHAPTER 1 7 Markets for Factors of Production After...

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