Unit 5: Factor Markets

marginal product equation

(change in TP)/(change in Q)

marginal revenue equation

(change in TR)/(change in output)

marginal revenue product equation

MP x MR

total product equation

P x Q OR MR x Q

marginal physical product equation

(change in TP)/(change in Q of resoures)

change in marginal fixed cost equation

(change in TFC)/(change in Q of resources)

marginal product of labor equation

(change in output)/(change in labor)

total fixed cost equation

(# of workers) x (wage rate)

factor of production

= inputs; any resource used to produce good/service; 4 categories (labor, land, capital, entrepreneurship)

factor markets

markets in which factors of production are bought and sold; most are perfectly competetive (buyers and sellers are price takers)

factor prices

price of factor markets

physical capital

often referred to as "capital"---consists of manufactured goods such as equipment, buildings, tools, and machines used to make other goods

human capital

is the improvement in labor created by education and knowledge that is embodied in the workplace; tech. boosts importance

allocative efficiency

markets for various types of essential workers allocated their factor of production to where it is needed; similar to goods markets; where MC = MB

derived demand

demand for a factor. It results from the demand for the output being produced

marginal product of labor (MPL)

is the increase in output from employing 1 more worker depends on the # of workers employed; total product depends on # of employers; downward-sloping curve

optimal # of workers

of workers needed to produce the optimal quantity of output

total product (TP)

is the total quantity of output produced by a firm or an economy using a given set of inputs over a specific period of time; upward-sloping curve

wage rate (W)

increase in cost from employing another worker; firm can hire any # of workers in a perfectly competetive market

benefit

additional revenue gained from employing another worker

marginal revenue product of labor (MRPL)

of a factor is the additional revenue generated by employing 1 more unit of that factor; able to hire an additional worker when MRPL > W; profit-maximization occurs when MRPL = W; hiring should continue until MRPL < W

marginal product curve

of a factor shows how the marginal revenue product of that factor depends on the quantity of the factor employed; MRPL slopes down because of diminishing returns to labor in production (price-making firm); is the demand curve of an individual firm (same with MRPL)

marginal revenue product of land

rent land up until MRP of land = rental cost; same for capital

rental rate

of either land or capital is the cost, explicit or implicit, of using a unit of that asset for a given period of time; is opportunity cost; demand curve slopes downward

time allocation

how many hours to spend on different activities

leisure

time available for purposes other than earning money to buy marked goods; higher purchasing power = lower ____; normal good

optimal labor of supply

marginal utility from 1hr of leisure = marginal utility from gods able to purchase

labor supply

substitution effect > income effect; high wage rate leads worker to supply more hours of labor; if income effect > substitution effect, high wage rate leads worker to supply lower hours

substitution effect

the change in demand for a good as a result of a change in the relative price of the good compared to that of other substitute goods

income effect

the resultant change in demand for a good or service caused by an increase or decrease in a consumer's purchasing power or real income

individual labor supply curve

shows how the quantity of labor supplied by an individual depends on that individual's wage rate; makes a backward C shape; slopes upward @ low wage rate (SE > IE); slopes downward @ high wage rate (SE < IE)

labor market equalibrium

occurs when the quantity of labor supplied equals the quantity of labor demanded at a particular wage rate; when supply curve meets demand curve

individual firm in labor market equalibrium

occurs when the quantity of labor supplied equals the quantity of labor demanded at a particular wage rate; when demand/MRPL curve meets supply curve/MFCL; supply curve is perfectly elastic

marginal factor cost (MFC)

also called, "marginal resource cost" (MRC), is the additional cost of employing an additional unit of a factor of production; in a perfectly competetive market, firm can hire as much labor as it wants @ market wage; profit maximization occurs when MR = MC

land supply

relatively inelastic; new supplies are difficult to extract and expensive; equalibrium occurs when supply curve meets demand curve

capital supply

relatively elastic; workers are responsive to price changes; equalibrium occurs when supply curve meets demand curve

equalibrium marginal revenue product

of a factor is the additional revenue generated by the last unit of that factor employed in the market as a whole; in competetive markets of land OR capital

economic rent

is the payment to a factor of production in excess of the minimum payment necessary to employ that factor; when supply is fixed, ____ is determined by level of demand; similar to producer surplus (but in factor market); can take form as land take (DWL for landowners)

factor demand shifters

1) changes in price of product the factor produces 2) changes in supply of other factors 3) changes in tech

changes in price of product the factor produces

factor demand shifter; factor demand = derived demand; if price changes, the marginal revenue changes and MRPL will change at all levels; increase or decrease in MRPL affects demand of labor to change the equalibrium wage; increase in price shifts demand right (same wage, high price @ higher quantity)

changes in supply of other factors

factor demand shifter; increased productivity increases MPL @ all levels of employment; same effect as price; caused by changes in land/capital

factor supply shifters

anything that alters willingnes to supply a factor (excluding price); 4 types include changes in preferences and social norms, changes in availability of labor, changes in opportunities, and changes in wealth

changes in wealth

factor supply shifter; increased wealth = increased leisure; income effect caused by change in wealth shifts labor supply curve; income effect from wage rate increase is a movement along labor supply curve

cost-minimization rule

employ factors so that the marginal product per $ spent on each factor is the same; when (MPL/W) > (MPK/RR), hire more labor and rent less; when (MPL/W) < (MPK/RR), rent more capital and hire less labor; firm will adjust quantities of inputs until MPK on each is =

cost-minimixation equation

(MPL/wage) = (MPK/rental rate)

perfectly competetive factor market

small firms; wage takers; MFC curve = horizontal line @ W (market)

imperfectly competetive factor market

large firms; wage makers; upward sloping supply curve; MFC > W (market); MFCL curve > ML curve; D curve = MRPL curve

monopsonist

Single buyer in a factor market

monopsony

a market in which there is a monopsonist; higher wage to hire more workers; MFCL > W (MFCL = difference between each additional unit of total labor cost)

total labor cost formula

L x W

equalibrium in imperfect competition

hire workers until MRPL = MFCL; optimal # of workers (L) is directly below intersection of MFC and MRP

monopsony graph with minimum wage