Unit 5 Flashcards

four factors of production

four factors of production

• land

• labor

• capital

• entrepreneurship

production factor - land

all natural resources that are used to produce goods and services

production factor - labor

any effort a person devotes to a task for which that person is paid

production factor - capital

physical - any human made resource used to create other goods and services

human - any skill or knowledge gained by a worker through education and experience

production factor - entrepreneurship

ambitious leaders that combine the other factors of production to create goods and services

factor prices

payments made for the use of factor production

land → rent

labor → wage

capital → interest

entrepreneurship → profit

demand for labor

• different quantities of workers businesses are willing and able to hire at different wages

• inverse relationship between wage and quantity demanded

supply for labor

• different quantities of individuals that are willing and able to sell their labor at different wages

• direct relationship between wage and quantity supplied

higher wages give workers incentives to

leave other industries or give up leisure activities

minimum wage

• minimum amount employers are allowed to pay their workers

• wage floor above equilibrium price

unemployment on a graph is

surplus of workers

benefits of increasing minimum wage

don’t have poor people living in the street

drawbacks of increasing minimum wage

leads to more unemployment and higher prices

marginal resource cost

additional cost of an additional resource (worker)

marginal resource cost (MRC) formula

change in total cost divided by change in inputs

marginal revenue product

additional revenue generated by an additional worker (resource)

marginal revenue product (MRP) formula

change in total revenue divided by change in inputs

labor market imperfections (reasons for differences in wage)

• insufficient/misleading job info → prevents workers from seeking better employment

• geographical immobility → people are reluctant or too poor to move and thus accept a lower wage

• unions → collective bargaining and threats to strike lead to higher wages

• wage discrimination → people are paid different for the same job based on race, gender, etc.

shifters in demand for labor

1. price of output (price of product increases, worker becomes more valuable)

2. productivity of the worker (more productive → more valuable)

3. change in price of other resources

derived demand

demand for resources is determined by the products they produce

shifters in supply of labor

1. education and training

2. availability of alternative options

3. immigration and mobility of workers

4. cultural expectations

5. working conditions

6. preferences for leisure

college leads to higher wages - human capital argument

education makes you more productive by giving you the skills to succeed in the workforce

college leads to higher wages - signaling argument

diplomas signal to employers that you are more likely to be a valuable employee

college leads to higher wages - ability bias argument

students attending college are more intelligent and hard working than non-college bound students and would earn more even if they didn’t go to college

types of labor markets

• perfect competition

• monopsony

characteristics of perfectly competitive labor markets

• many small firms hiring workers (no one firm is large enough to manipulate the market)

• many workers with identical skills

• wage is constant

• workers are wage takers (firms can hire as many workers as they want at a wage set by the industry)

MRC - perfectly competitive labor markets

MRC = wage set by market

MRC is constant

MRP - perfectly competitive labor markets

MRP = marginal product x price

why does MRP eventually fall

diminishing marginal returns

MRP determines ---- for labor

demand

• firm is willing and able to pay each worker up to the amount they generate

continue to hire until

MRP = MRC

labor market firm graphs

supply (wage) is set by industry

monopsony characteristics

• one firm hiring workers (large enough to manipulate market)

• workers are relatively immobile

• firm is wage maker

monopsony graph

• MRC straight upward

• supply of labor straight upward, below MRC

• MRP up then down