Because land and labor are used together in production a smaller supply of

Because land and labor are used together in

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Because land and labor are used together in production, a smaller supply of workers also affects the market for land, the other major factor of production in medieval Europe. With fewer workers available to farm the land, an additional unit of land produced less additional output. In other words, the marginal product of land fell. Thus, we would expect the Black Death to lower rents. In fact, both predictions are consistent with the historical evidence. Wages approximately doubled during this period, and rents declined 50 percent or more. The Black Death led to economic prosperity for the peasant classes and reduced incomes for the landed classes. Workers who survived the plague were lucky in more ways than one. 18-5 Conclusion
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This chapter explained how labor, land, and capital are compensated for the roles they play in the production process. The theory developed here is called the neoclassical theory of distribution. According to the neoclassical theory, the amount paid to each factor of production depends on the supply and demand for that factor. The demand, in turn, depends on that particular factor's marginal productivity. In equilibrium, each factor of production earns the value of its marginal contribution to the production of goods and services. The neoclassical theory of distribution is widely accepted. Most economists begin with the neoclassical theory when trying to explain how the U.S. economy's $15 trillion of income is distributed among the economy's various members. In the following two chapters, we consider the distribution of income in more detail. As you will see, the neoclassical theory provides the framework for this discussion. Even at this point, you can use the theory to answer the question that began this chapter: Why are computer programmers paid more than gas station attendants? It is because programmers can produce a good of greater market value than can gas station attendants. People are willing to pay dearly for a good computer game, but they are willing to pay little to have their gas pumped and their windshield washed. The wages of these workers reflect the market prices of the goods they produce. If people suddenly got tired of using computers and decided to spend more time driving, the prices of these goods would change, and so would the equilibrium wages of these two groups of workers. 18-6A Summary 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. 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. The supply of labor arises from individuals' trade-off between work and leisure. An upward-sloping labor-supply curve means that people respond to an increase in the wage by working more hours and enjoying less leisure.
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