Factor Markets unit 5 micro

Product Markets

Goods supplied by firms, demanded by households

Factor (resource) markets

Supplied by households, demanded by firms

Factor (resources)

land, labor, capital, entrepreneurship

Income distribution

Over 70% of money paid to factors of production goes to worker compensation

Worker compensation

Payment on labor and human capital

Human Capital

Market value of all accumulated knowledge and skills

Marginal Revenue Product (MRP)

Producers employ each factor of production to the point where marginal revenue product is equal to the factor’s price (MRP = MRC)

Marginal Revenue Product (MRP) =

Marginal Phyiscal Product (MPP) x Marginal Revenue (MR)

Derived Demand

Demand for a factor of production, because it is based on the demand for the good or service it produces

A firm’s demand curve for labor is equal

To its marginal revenue product of labor

Factors that cause resource demand to shift

Price of goods or services they produce, Technology (in case of labor, technology could either be a substitute or a complement), Change in price or supply of other inputs, Number of companies

Labor Supply

We assume the market labor supply curve is upward sloping

Changes to labor supply

Population, Wealth, Social Norms, Opportunities, Government Policies