Markets for Factors of Production (Chapter 11) - Vocabulary

Vocabulary flashcards covering key terms and concepts from the lecture notes on markets for factors of production.

Factors of production

The three main inputs used to produce goods and services: labor, physical capital, and land.

Labor

Human effort used in production; one of the three factors of production.

Physical capital

Durable inputs like machines, tools, buildings that aid production.

Land

Natural resources used in production (e.g., land, minerals, raw materials).

MPL (Marginal Product of Labor)

The additional output produced by hiring one more unit of labor.

VMPL (Value of the Marginal Product of Labor)

VMPL = MPL × price of output; the extra revenue an additional worker generates in a competitive market.

Production function

The relationship between the quantity of inputs used and the quantity of output produced.

Derived demand

Demand for labor that arises from the demand for the firm’s product.

Wage

The price paid for labor in the labor market.

Competitive labor market

A market with many buyers and sellers where the wage equals the value of the marginal product of labor (VMPL).

VMPL = Wage condition

In profit-maximizing employment, firms hire workers until VMPL equals the wage.

Labor-leisure tradeoff

The choice between working and enjoying leisure; workers supply labor up to where the marginal benefit of leisure equals the wage (cost of leisure).

Marginal benefit of leisure

The value of an additional hour of leisure, which, when determining labor supply, is often equated with the wage.

Human capital

An individual’s stock of skills, education, health, and training that increases productivity.

Compensating wage differential

Wage premiums paid to attract workers to occupations with unattractive aspects.

Discrimination

Unfavorable treatment in wages or employment based on group characteristics.

Taste-based discrimination

Discrimination based on prejudice or bias by employers toward a group.

Statistical discrimination

Discrimination based on proxies for productivity when productivity is uncertain.

Evidence-Based Economics

Using empirical data and studies to test economic hypotheses; evidence suggests discrimination exists in labor markets.

VMPK (Value of the Marginal Product of Capital)

The revenue contribution of an additional unit of physical capital; VMPK = MPK × price.

MPK (Marginal Product of Capital)

The additional output produced by one more unit of physical capital.

Shift factors for labor demand

Determinants such as the price of the produced good and technology; higher price or productive tech increase labor demand.

Labor-complementary technology

Technology that increases the productivity of labor, shifting labor demand to the right.

Labor-saving technology

Technology that substitutes for labor, shifting labor demand to the left.

Population changes (labor supply)

More people in the population increase the supply of labor, shifting supply to the right.

Opportunity costs (labor supply)

The foregone alternatives to working; changes in opportunity costs shift the labor supply curve.

Wage inequality

Differences in wages due to human capital, compensating differentials, and discrimination.

Market for the factors of production

Markets for labor, physical capital, and land where prices are determined by supply and demand.