ch 19 - The Markets for the Factors of Production

ECON 1101

factors of production

inputs used to produce goods and services: labor, land, capital

derived demand

a firm’s demand for a factor of production is derived from its decision to supply a good in another market

production function

the relationship between the quantity of inputs used in production and the quantity of output from production

marginal product of labor (MPL)

the increase in the amount of output from an additional unit of labor

diminishing marginal product

the marginal product of an input declines as the quantity of the input increases

value of marginal product of labor (VMPL)

the marginal product of an input (labor) times the price of the output

labor demand curve

the graphical representation of the relationship between the wage rate and the quantity of labor demanded in a market

labor supply curve

the graphical representation of the relationship between the wage rate and the quantity of labor supplied in a market

capital

the equipment and structures used to produce goods and services

purchase price

the price paid to own that factor indefinitely

rental price

the price paid to use that factor for a limited period of time

neoclassical theory of distribution

the amount paid to each factor of production depends on the supply and demand for that factor

• each factor is paid by the value of the of its marginal product