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)