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5.1: Factor Markets

The Four Factors Of Production

  1. Land: All Natural Resources That Are Used To Produce Goods And Services

    • Paid rent

  2. Labor: Any Effort A Person Devotes To A Task For Which That Person Is Paid

    • Paid wage

  3. Capital

    1. Physical Capital: Any Human-made Resource That Is Used To Create Other Goods And Services
    2. Human Capital: Any Skills Or Knowledge Gained By A Worker Through Education And Experience
    • Paid interest

  4. Entrepreneurship: Ambitious Leaders That Combine The Other Factors Of Production To Create Goods And Services

    • Paid profit
  • In The Product Market, Individuals Pay Businesses For Goods And Services
  • In The Factor Market, Businesses Pay Individuals For The Use Of Resources

The Labor Market

Labor Demand And Supply

  • Demand For Labor
    • Demand For Labor: The Different Quantities Of Workers That Businesses Are Willing And Able To Hire At Different Wages
    • There Is An Inverse Relationship Between Wage And Quantity Of Labor Demanded
    • Demanded By Firms — Demand For Labor Shows The Quantities Of Workers That Firms Hire At Different Wages
  • Supply Of Labor
    • Supply Of Labor: The Different Quantities Of Individuals That Are Willing And Able To Sell Their Labor At Different Wages
    • There Is A Direct Relationship Between Wage And Quantity Of Labor Demanded
    • Workers Have A Trade-off Between Work And Leisure
    • Supplied By Individuals — Supply Of Labor Is The Quantity Of Workers That Are Willing To Work At Different Wage Rates
    • Higher Wages Give Workers Incentive To Leave Other Industries And Give Up Leisure Activities
  • Equilibrium
    • Wage (the Price Of Labor) Is Set By The Market
    • Minimum Wage: A Minimum Amount That Employers Are Allowed To Pay Their Employees (a Wage Floor)
  • Marginal Revenue Product
    • Marginal Revenue Product: The Additional Revenue Generated By An Additional Worker (resource)
    • In Perfectly Competitive Product Markets, The MRP = MP X Price
    • MRP = [change In Total Revenue]/[change In Inputs]
  • Other Reasons For Differences In Wage
    • Labor Market Imperfections
    • Insufficient/misleading Job Information — Prevents Workers From Seeking Better Employment
    • Geographical Immobility — Many People Are Reluctant Or Too Poor To Move, So They Must Accept A Lower Wage
    • Unions — Collective Bargaining And Threats To Strike Often Lead To Higher Equilibrium Wages
    • Wage Discrimination — Some People Are Paid Differently For Doing The Same Job Based On Factors Such As Race, Gender, And Age (illegal)