Chapter 18 - The Markets for the Factors of Production

• Factors of production: the inputs used to produce goods and services.

18-1 The Demands for Labor

The Competitive Profit-Maximizing Firm

• In this firm two assumptions are made: competition exists in both the product and input markets, and the firm is a profit maximizer.

The Production Function and the Marginal Product of Labor

• Production function: the relationship between the quantity of inputs used to make a good and the quantity of output of that good.
• Marginal product of labor: the increase in the amount of output from an additional unit of labor.
• Diminishing marginal product: the property whereby the marginal product of an input declines as the quantity of the input increases.

The Value of the Marginal Product and the Demand for Labor

• Value of the marginal product: the marginal product of input times the price of the output.
• A competitive firm hires workers until the marginal product of labor's value is equal to the wage.

What Causes the Labor-Demand Curve to Shift?

• The output price and technological change cause the labor-demand curve to shift.
• Technological change doesn't benefit all workers.
• The amount of output a typical U.S. worker produced between 1960 and 2015 increased by 195%.

18-2 The Supply of Labor

The Trade-Off between Work and Leisure

• The income effect and substitution effect are conflicting effects on someone's labor-supply decision.
• The trade-off can cause a backward bending supply curve of labor.
• An income effect is an effect during the change in wage where the higher wage increases income and the demand for leisure.
• A substitution effect is when the higher wage increases the cost of leisure but reduces the demand for it.

What Causes the Labor-Supply Curve to Shift?

• Changes in tastes, alternative opportunities, and immigration cause the labor-supply curve to shit.
• The women's participation in the labor force increases as a change in tastes.

18-3 Equilibrium in the Labor Market

Shifts in Labor Supply

• 95% of U.S. citizens would annually benefit from a higher number of highly educated foreigners working legally after immigrating to the U.S.
• An increase in immigration increases the supply of physicians, while the demand for apples and apple pickers also increases.

Shifts in Labor Demand

• Productivity by output per hour grew by 2.1% each year from 1959 to 2012.
• Productivity is key in acquiring a higher standard of living.
• Physical capital, human capital, and technological knowledge are key in determining levels of productivity.

18-4 The Other Factors of Production: Land and Capital

• Capital: the equipment and structures used to produce goods and services.

Equilibrium in the Markets for Land and Capital

• When someone pays to use a factor for a limited period of time, they're paying a rental price.
• "Labor, land, and capital each earn the value of its marginal contribution to the production process."

Linkages Among the Factors of Production

• When an event changes the supply of any factor of production, the earnings of all the factors can be altered.

18-5 Conclusion

• The theory of neoclassical theory of distribution explains how labor, land, and capital are compensated for the roles they play in the production process.

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