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Unformatted text preview: Chapter 18 The Markets for the Factors of Production WHAT’S NEW IN THE THIRD EDITION: The concept of marginal revenue product is introduced and defined. There is a new FYI box on “Monopsony.” LEARNING OBJECTIVES: By the end of this chapter, students should understand: the labor demand of competitive, profit-maximizing firms. the household decisions that lie behind labor supply. why equilibrium wages equal the value of the marginal product of labor. how the other factors of production—land and capital—are compensated. how a change in the supply of one factor alters the earnings of all of the factors. CONTEXT AND PURPOSE: Chapter 18 is the first chapter in a three-chapter sequence that addresses the economics of labor markets. Chapter 18 develops and analyses the markets for the factors of production—labor, land, and capital. Chapter 19 builds on Chapter 18 and explains in more detail why some workers earn more than do others. Chapter 20 addresses the distribution of income and the role the government can play in altering the distribution of income. 93 THE MARKETS FOR THE FACTORS OF 18 94 ✦ Chapter 18/The Markets for the Factors of Production The purpose of Chapter 18 is to provide the basic theory for the analysis of factor markets—the markets for labor, land, and capital. As you might expect, we find that the wages earned by the factors of production depend on the supply and demand for the factor. What is new in the analysis is that the demand for a factor is a derived demand . That is, a firm’s demand for a factor is determined by its decision to supply a good in another market. KEY POINTS: 1. The economy’s income is distributed in the markets for the factors of production. The three most important factors of production are labor, land, and capital. 2. The demand for factors, such as labor, is a derived demand that comes from firms that use the factors to produce goods and services. Competitive, profit-maximizing firms hire each factor up to the point at which the value of the marginal product of the factor equals its price. 3. The supply of labor arises from individuals’ tradeoffs between work and leisure. An upward-sloping labor supply curve means that people respond to an increase in the wage by enjoying less leisure and working more hours....
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- Fall '08
- Marginal product, labor market.