Econ103part09 - Part 9 Factor Markets Markets for factors...

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Part 9 Factor Markets Markets for factors of production: labour, capital, land (sometimes entrepreneurship is added) Physical capital and human capital Each factor’s price represents an income to the owner of that factor: the wage rate, the interest rate or rate of profit on capital, the rent on land Factor prices and the distribution of income Factor distribution and size distribution of income
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Factor Demand In competitive resource markets the price of each factor will be determined by demand and supply The demand for factors is a derived demand – derived from the demand for outputs The demand for labour, for example, will depend on the revenues an employer can gain from hiring labour relative to the cost of labour
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Factor Demand Can think about this in terms of the marginal product of a factor Use labour as an example Assume perfect competition in the output market—price of the output is given Go back to the firms TP curve and derive the MP of labour This assumes quantity of capital is fixed (short run) In a competitive output market the firm is a price taker
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Factor Demand The revenue a firm can make from hiring a unit of labour is the MP of labour times the unit price of the output This is the value of the MP (VMP) VMP declines as more labour is
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This note was uploaded on 01/28/2011 for the course ECON 103 taught by Professor Rutherford during the Winter '10 term at University of Victoria.

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Econ103part09 - Part 9 Factor Markets Markets for factors...

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