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factor
something a business uses to produce the goods and services for consumers
factor market
the place where firms purchase what they need to produce goods and services
factors of production
items they need
-land
-capital
-labor
-entrepreneurship
factor prices
how much a firm pays to aquire the land, labor, or machinery that is apart of creating a good or service
-wage (goes with labor)
-interest (goes with capital)
-rent (goes with land)
-profit (goes with entreprenuership)
derived demand
the demand for the factors of production from popular products
interests
-goes with capital
the "price" associated with the use of capital
rent
-goes with land
how much a person or business pays for temporary use of ttols, equipment, or office space in order to create goods or services
wage
-goes with labor
money that a person or business pays to others for their labor, time, and effort
profit
-goes with entrepreneurs
the payment made to entrepreneurs for combining the other three factors of production to produce goods and services, for managing these resources, and as a reward for taking the risk to produce those goods and services for customers and society
decisions of hiring
1. productivity
2. output price
3. factor service
productivity
-concept of making decisions of hiring
measure of how much the employer can be out of the hire
output price
-concept of making decisions of hiring
amount a business can charge for a finished good or service
factor service
-concept of making decisions of hiring
qualifies how much a person or business must spend to get those inputs for the business to produce those goods and services
how do wage rates affect employment
quantity of labor demand is negatively related to the wage
-wages increase qd for labor will decrease
-higher wages for employees = higher costs for employers -> will either pass along to consumers through higher output prices or backwards to owners of firm through lower profit
how do wage rates affect labor supply
quantity of labor supplied is positively related to the wage rate in a given labor market, assuming everything stays constant
-increase wages -> people will enter labor market = quantity of labor supplied will increase
what do factor prices convey
1. provide incentives to people and businesses
2. convey information to people and businesses
marginal revenue product (mrp)
the charge in income or benefit received from the addition of one extra unit assuming that everything else stays the same
mrp formula
marginal product of labor x marginal revenue
marginal product of labor
the number of products that each extra worker produces
marginal revenue
how much more a business or individual makes by producing one more unit of a good or service
what reasons cause mrp to decline
-mp declining
-mr is declining
marginal resource cost (mrc)
extra cost a person or business incurs to make one more unit of the good or service
mrc formula
change in total cost/ change in quantity of labor
mrp > mrc
producer will higher more labor, which will result in more output produced
mrp < mrc
producer will hire fewer workers, which will result in fewer units of output produced
mrp = mrc
an equilibrium level of hiring
determinants of labor supply
-education
-immigration
-working conditions
-age distribution
-availability of alternative options
-preferences for leisure
-culturual expectations and discrimination
determinants of labor demand
like workers seeking jobs, employers seeking workers also have economic incentives and constraints that affect their behavior
-output price is directly related to mr which in connection with mp, impacts mrp
-productivity
labor supply curve
as wages rise, more people will be willing to work
labor demand curve
as wages rise, employers hire workers for fewer hours
substitution effect
if the employee is paid a higher wage, this employee will have an incentive to work more
-worker has incentive to substitute labor for leisure time, thus spending more hours on the job
income effect
higher wage increases income that the worker would now prefer to use and spend
labor-leisure tradeoff
a person's hourly wage rises, he or she usually works more hours at first but then gradually cuts back to have more leisure time
perfectly competitive factor market
no buyer and no seller has enough power to affect what everyone else will charge
characteristics of perfectly competitive factor markets
-many buyers and sellers
-similar skills and abilities
perfectly competitive labor market on a graph
marginal factor cost
extra money the employer must spend to hire one more worker
marginal revenue product of labor
the extra money the employer gets from adding one more unit of a resource
mrp > mfc
employers will increase the number of employees
mrp < mfc
employer will decrease the number of employees
mrp = mfc
employer will keep the equilibrium number of employees
labor market vs output market
-output is where businesses sell the goods and services they produce
-company can be perfect competitor in labor market and other factor markets and an imperfect competitor in the different output markets where it sells its products
output market
where businesses sell the goods and services they produce
calculating profit maximizing behavior
can help determine the optimal mix of factors for this goal
spending on inputs
each input is a good or service that a company uses to create another good or service
marginal product
the extra unit of output you get from that input
calculating marginal revenue product
mrp=mp x mr
calculating vmpl and mpr in a perfectly competitive market
formula different bc price = the mr in a competitive output market
mrp= mpl x p
value of the marginal product of labor (vmpl)
the worth of the last unit produced by the last worker the employer hired
vmpl formula
vmpl= mpl x p
vmpl > unit price
employer will increase the number of employees
vmpl < unit price
employer will decrease the number of employees
vmpl = unit price
employer will keep the equilibrium number of employees
monopsonistic
only one buyer for labor
monopsony
many workers but only one employer
monopsony and wages
less incentive to increase their workers's wage or to improve working conditions or beefits
monopsonies and power
-can pressure suppliers for more competitive prices on raw materials
-high percentages of people in an area -> can pressure local governments to grant them tax credits, land grants, or other perks in exchange for keeping jobs in the community
near-monopsonies
even if other employers are hiring the same types of worker in the same area of the country, a large and powerful company can exercise considerable influence on workers, competitors, and governments
monopsonies and competition
monopsony can still face competition and experience pressure to lower prices, even if it has a great deal of control over the labor market and some control over local government
profit-maximizing behavior in monopsonistic markets graph
-wages increase -> number of workers available increase
-employer hires more workers -> mrp decreases
advantages of a monopsony
marginal factor cost > supply price of labor
pressure to pay higher wages
if employer has to pay new employees, most likely have to pay those same higher wages to the employees who were hired earlier
calculating profit-maximizing behavior in a monopsony
employer will keep hiring workers as long as the mrp > the marginal factor cost
