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

  1. 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)

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