Unit 5- Factor Market

vocab

Derived Demand

The demand for a resource that depends on the demand for the products it helps to produce

Marginal Physical Product

The additional output resulting from the use of an additional unit of a variable input, holding all other inputs constant.

Marginal Revenue Product

The change in total revenue resulting from employing an additional unit of a resource, holding all other inputs constant. It is calculated as Marginal Physical Product multiplied by the Marginal Revenue of the output.

Marginal Resource (Factor) Cost

The amount the total cost of employing a resource increases when one more unit of the resource is employed.

MRP=MRC Rule

The principle that to maximize profit a firm should hire resources up to the point where Marginal Revenue Product equals Marginal Resource Cost.

Substitution and Output Effects

The changes in quantity demanded of a good resulting from a change in its price, which can be divided into the substitution effect (changing consumption from one good to another) and the output effect (changing overall consumption levels due to a price change).

Least Cost Combination of Resources

The quantity of each resource a firm must employ in order to produce a particular output at the lowest total cost; the combination at which the ratio of the marginal product of a resource to it’s marginal resource cost is the same for the last dollar spent on each of the resources employed.

Profit Maximizing Combination of Resources

The quantity of each resource a firm must employ to maximize it’s profit or minimize its loss; the combination in which the marginal revenue product of each resource is equal to it’s marginal MRC

Marginal Productivity Theory of Income Distribution

The contention that the distribution of income is equitable when each resource receives money payment equal to its marginal contribution to the firm’s revenue

Factor Payments

The income people receive for supplying factors of production, such as land, labor, capital, and entrepreneurship. These payments include rent for land, wages for labor, interest for capital, and profit for entrepreneurship.

Perfectly Competitive Labor Market

Theoretical model where numerous employers and workers interact, with no single entity able to influence the wage rate

Monopsonist/Monopsony

A market structure in which there is only a single buyer of a good service or resource.

Economic Rent

The price paid for the use of land and other natural resources, the supply of which is fixed.

Nominal Wages

The amount of money recieved by a worker per unit of time

Real Wages

The amount of goods and services a worker can purchase with their nominal wage ; purchasing power of nominal wage

Interest (income)

Payments to those who supply the economy with capital

Wage Discrimination

The payment of a lower wage to members of a less favoured group than that paid to members of a more liked group for the same work.

Value of Marginal Product

The additional revenue generated by employing one more unit of input

Factors that Determine Labor Supply

Includes: wage rates, human capital, working conditions, and non-economic factors like personal preferences and the opportunity cost of leisure.