Chapter+18+Emily+K



  How can we use the market of factors of production to explain income distribution?



 The wage for every occupation varies, and this variation can be related back to the supply and demand for factors of production. Factors of production, as you may remember from previous chapters, refer to land, labor and capital. Every company relies on these inputs in order to function. For example, if you have a restaurant, the land would be the restaurant space, labor would be the cook and the waiters, and capital would include the cooking ovens, pans, tables etc. One important difference that the factors of production markets have from regular markets is that they have a derived demand. A derived demand means that their demand is based upon the firms decision on the quantity of production. It is related to both the supply and demand curve of the market. We will be analyzing the derived factor demand in this chapter by starting with labor. We are going to compare the demand of factors to a competitive firm for this analysis.

**DEMAND FOR LABOR** As an example, let’s take the market for goldfish. In examining this competitive profit maximizing firm, we assume two things: 1) the firm is both competitive in the market for goldfish and the market for labor 2) the firm is profit maximizing, so the only thing that influences the decision making process of the firm is how to maximize surplus. As we see in the graphs below the market for goldfish and the market for its labors follow the exact same trend.  The Goldfish market must also figure out how the number of workers affect the quantity of goldfish produced. The production function describes the relationship between the number of inputs (which in this case would be workers) and the number of total output (goldfish). The graph of the production function is a curve going up. As the Quantity of workers increases, the quantity of apples first increase more than the quantity of apple pickers. However, as we add workers the quantity of apples increase at a much lower rate. The shape of the graph is because of the diminishing marginal product of labor. As we increase the number of workers, additional workers have to share the same machines, and they start becoming less and less efficient. So the number of additional workers always tends to contribute less and less to the total production of goldfish.
 * The Production Function**

In order to figure out how much one worker contributes to the total revenue, economists convert the marginal product of labor to the value of the marginal product. The value of the marginal product is found by multiplying the input to the price of the output. This allows firms to measure the revenue each worker brings. It is also called the marginal revenue product, which is the extra revenue a firm gets for each additional worker. An important thing to note is that the value of marginal product of labor curve is a linear line sloping down. This is because the marginal product of labor diminishes as the number of workers increase. The firm must then maximize its profit by producing at the cross point of the VMP and market wage. If it hired workers above this point, then it would mean the VMP is less than wage, making the worker unprofitable.
 * Value of Marginal Product**


 * Causes of a shift in the demand curve**

When the output changes, it also changes the labor-demand curve. When the number of goldfish produced increases, then firms would want to hire more workers. Conversely, if the number of goldfish produced decreases, the firms would want to hire less workers.
 * 1. OUTPUT PRICE**

When a new technological discovery comes in to change the production process of a firm, it also changes how much labor the firm needs. If the goldfish firm gets a machine that takes out all the ugly goldfish, the firm no longer needs to hire a workers to take out the gold fish.This is called the labor-saving technological change. However, labor-augmenting technological changes also occur. This might happen when the goldfish farm wants to invent a new machine that would increase the profitability of goldfish, and they hire scientists to work on the machine.
 * 2. TECHNOLOGY**

If supply of other factors decreases, the marginal product of workers will decrease, decreasing the demand for workers in the firm.
 * 3. SUPPLY OF OTHER FACTORS**


 * Causes of a shift in the supply curve**

When the tastes of goldfish workers change, and they decide to make chocolate chip cookies, the supply curve of goldfish would go down. But when al the chocolate chip cookies workers decide that goldfish is more fun to make, the supply curve of goldfish would go up.
 * 1. TASTES**

When there are alternative opportunities for goldfish workers arise, then the supply curve of goldfish workers would decrease.
 * 2. ALTERNATIVE OPPORTUNITIES**

When workers come from other places, then the supply curve would go up since the immigrants would be looking for jobs.
 * 3. IMMIGRATION**

True or False 1. The three most important factors of production are labor, land and money 2. A profit-maximizing competitive firm hires workers at the point where value of marginal product = wage 3. The value of marginal product curve is the supply-demand curve for a competitive firm 4. The labor demand curve would shift up if there was a labor-augmenting technological development  1. False 2. True 3. False 4. True  (highlight the above to see answers)



**derived demand**- quality of the factor demand where the supply and demand curve of the competitive market influences the demand curve of the factors of production market
 * Factors of Production**- Inputs needed to produce goods
 * Production Function**- The relationship of how the number of inputs affects the number of output
 * Marginal product of labor**- an additional worker increases the total output
 * diminishing marginal product**- each additional worker contributes less to the total output than the one before
 * value of the marginal product**- marginal product of input multiplied by the price of the output
 * capital**- anything that is used to produce a good/service