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)