Chapter+Eighteen

Chapter 18 The Markets for the Factors of production

This chapter explains how labor, land, and capital are compensated for the roles they play in the production process.


 * __Neoclassical theory of distribution__**: the amount paid to each factor of production depends on the supply and demand for that factor. The demand, in turn, depends on that particular factor's marginal contribution to the production of goods and services.


 * The economy's income is distributed in the markets for the factors of production. The three most important factors of production are labor, land, and capital.
 * The demand for factors, such as labor, is a derived demand that comes from firms that use the factors to produce goods and services. Competitive, profit-maximizing firms hire each factor up to the point at which the value of the marginal product of the factor equals its price.
 * The supply of labor arises from individuals' trade-off between work and leisure. An upwardsloping labor-supply curve means that people respond to an increase in the wage by enjoying less leisure and working more hours.
 * The price paid to each factor adjusts to balance the supply and demand for that factor. Because factor demand reflects the value of the marginal product of that factor, in equilibrium each factor is compensated according to its marginal contribution to the production of goods and services.
 * Because factors of production are used together, the marginal product of any one factor depends on the quantities of all factors that are available. As a result, a change in the supply of one factor alters the equilibrium earnings od all the factors.

The Competitive Profit Maximizing Firm is **a firm that is a price taker in both the labor market and the market in which it sells its goods or services.** This means that **it competes for both market share __and for labor__.** Since there are a great many firms to work for, laborers have a choice in who to work for. Since there is only a limited number of laborers, firms must compete by offering higher and higher wages to workers in hopes of enticing them to work for them.
 * //The Competitive Profit Maximizing Firm//**

//**The Supply of Labor**// While the total supply of labor is limited, shifts in supply do happen. The amount of labor available stems from the individual laborer's trade-off between work and leisure. **When an individual values money or pay more than leisure, they will work more**. Also, environmental factors can also shift labor supply. For example, if a major competing firm in a similar market which shares the same type of laborers were to go bankrupt, there would suddenly be a large influx of skilled laborers in the unemployed labor pool, and the supply of laborers would go up. Similarly, immigration laws could also affect the supply of labor in a given country as it may become either easier or harder for immigrant workers to enter the country.



^ Change in labor market due to immigration.



Just like a regular Supply and Demand curve, when supply of labor goes up from Supply 2 to 1 (I mislabeled sorry) the demand for more labor falls and the price, or wage paid to laborers go down.

Source: http://www.henrygeorge.org/images/pie1.jpg

__Media__
media type="youtube" key="L4Ykc_50I6k" height="344" width="425"

__Summary__
- The factors of productions are labor, land, and capital. - Labor is demand, which profit-maximizing firms hire up to point at which marginal product of the factor equals its price. - The price adjusts to balance supply and demand for that factor. Factor demand reflects the value of the marginal product. - In equilibrium, each factor is compensated according to its marginal contribution to the production - All factors of production are used together, thus the marginal product of any one facotr depends on the quantities of all factors are that available.

__Questions__
1. What is price paid to any factor of production equal to? a. labor b. land c. value of the marginal product of that factor d. supply

2. What was the positive impact of the Black Death

3. What does profit maximization by demand labor ensures about equilibrium wage?

answers 1. C. 2. Black Death resulted in economic prosperity for the peasant classes amongst the survivors and reduced incomes for landed classes. 3. Profit maximization by the firms that demand labor ensures that the equilibrium wage equals the value of marginal product of labor.