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&-%& THE A.AT/01 /2 2ACT/R 0ARKET"

The four factors of production that produce goods andservices are:

• Labor • Capital• Land• Entrepreneurship

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2actor price

The price of a factor of production.

• The wage rate is the price of labor.

• The interest rate is the price of capital.

• Rent is the price of land.

2actor mar$et

A market for labor capital or land.

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abor 0ar$ets

abor mar$et

A collection of people and firms who are trading laborservices.

3ob

A long!term contract between a firm and a household toprovide labor services.

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2inancial 0ar$ets

Capital

The tools instruments machines and otherconstructions that have been produced in the past andthat businesses use to produce goods and services.

2inancial capitalThe funds that firms use to bu" and operate ph"sicalcapital.

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"toc$ 0ar$et

A stoc$ mar$et is a market in which the shares in the

stocks of companies are traded.E%amples: the &ew 'ork #tock E%change &A#(A).

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4ond 0ar$et

A bond mar$et is a market in which bonds issued b"

firms or governments are traded.4ond

A promise to pa" specified sums of mone" on specifieddates.

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and 0ar$ets

Land consists of all the gifts of nature.

The markets for raw materials are called commoditymar$ets .

Competitive 2actor 0ar$ets*ost factor markets have man" bu"ers and sellers andare competitive markets.

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#erived demand

The demand for a factor of production which is derived

from the demand for the goods and services it is usedto produce.

5alue of mar(inal product

The value to a firm of hiring one more unit of a factor ofproduction which e+uals price of a unit of outputmultiplied b" the marginal product of the factor ofproduction.

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5alue of 0ar(inal Product

Table ,-., on the ne%t slide walks "ou through the

calculation of the value of marginal product.

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The first two columns ofthe table are the firm stotal product schedule.

To calculate marginalproduct find thechange in total productas the +uantit" of laborincreases b" , worker.

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To calculate the valueof marginal productmultipl" the marginalproduct numbers b"the price of a carwash which in thise%ample is /0.

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The blue barsshow the valueof the marginalproduct of thelabor that *a%hires based onthe numbers in

the table.

1igure ,-.,shows the valueof the marginalproduct at *a% s2ash n 2a%.

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The orange lineis the firm svalue of themarginalproduct of laborcurve.

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A 2irm6s #emand for abor

A firm hires labor up to the point at which the value of

marginal product e+uals the wage rate.3f the value of marginal product of labor e%ceeds thewage rate a firm can increase its profit b" emplo"ingone more worker.

3f the wage rate e%ceeds the value of marginal productof labor a firm can increase its profit b" emplo"ing onefewer worker.

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A 2irm6s #emand for abor Curve

A firm s demand for labor curve is also its value ofmarginal product curve.

3f the wage rate falls a firm hires more workers.

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1igure ,-.4 shows the demandfor labor at *a% s 2ash n 2a%.

At a wage rate of /,5.65 an hour*a% makes a profit on the first 4workers but would incur a loss onthe third worker.

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*a% s demand for labor curve isthe same as the value ofmarginal product curve.

1igure ,-.4 shows the demandfor labor at *a% s 2ash n 2a%.

At a wage rate of /,5.65 an hour*a% makes a profit on the first 4workers but would incur a loss onthe third worker.

#o *a% s +uantit" of labordemanded is 4 workers.

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The demand for labor curveslopes downward because thevalue of the marginal product oflabor diminishes as the +uantit"of labor emplo"ed increases.

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Chan(es in the #emand for abor

The demand for labor depends on:

• The price of the firm s output• The prices of other factors of production• Technolog"

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The Price of the 2irm6s /utput

The higher the price of a firm s output the greater is itsdemand for labor.

The Prices of /ther 2actors of Production

3f the price of using capital decreases relative to thewage rate a firm substitutes capital for labor andincreases the +uantit" of capital it uses.7suall" the demand for labor will decrease when theprice of using capital falls.

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Technolo(y

&ew technologies decrease the demand for some t"pesof labor and increase the demand for other t"pes.

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The "upply of abor

8eople suppl" labor to earn an income. *an" factors

influence the +uantit" of labor that a person plans toprovide but the wage rate is a ke" factor.1igure ,-.0 on the ne%t slide shows an individual s laborsuppl" curve.

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The tableshows Larr" slabor suppl"schedulewhich isplotted in thefigure asLarr" s laborsuppl" curve.

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% 9reaches ama%imum 9

+% 9increases

*% As the wagerate risesLarr" s

+uantit" oflaborsupplied 9

8% 9thendecreases.

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Larr" s laborsuppl" curveeventuall"bends

backward.

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0ar$et "upply Curve

A market suppl" curve shows the +uantit" of laborsupplied b" all households in a particular ob.

3t is found b" adding together the +uantities of laborsupplied b" all households at each wage rate.1igure ,-.; on the ne%t slide shows the suppl" of car

wash workers.

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This suppl"curve showshow the+uantit" of carwash workerssuppliedchanges whenthe wage ratechanges otherthingsremaining thesame.

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3n a market fora specific t"peof labor the+uantit"suppliedincreases asthe wage rateincreases otherthingsremaining thesame.

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!nfluences on the "upply of abor

Three ke" factors influence the suppl" of labor:

• Adult population• 8references• Time in school and training

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Adult Population

An increase in the adult population increases the suppl"of labor.

Preferences

There has been a large increase in the suppl" of femalelabor since ,

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Time in "chool and Trainin(

The more people who remain in school for full!timeeducation and training the smaller is the suppl" of low!skilled labor.

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abor 0ar$et E9uilibrium

Labor market e+uilibrium determines the wage rate and

emplo"ment.1igure ,-.6 on the ne%t slide illustrates e+uilibrium inthe market for car wash workers.

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&% The e+uilibrium wagerate is /,5.65 an hour.

)% The e+uilibrium +uantit"

of labor is 055 workers.

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3f the wage rate is below/,5.65 an hour the +uantit"demanded e%ceeds the+uantit" supplied and thewage rate rises.

3f the wage rate e%ceeds/,5.65 an hour the +uantit"demanded is less than the+uantit" supplied and thewage rate falls.

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The #emand for 2inancial Capital

A firm s demand for financial capital stems from itsdemand for ph"sical capital to produce goods andservices.

The +uantit" of ph"sical capital that a firm plans to usedepends on the price of financial capital>the interestrate.

Two factors that change the demand for captial are:• 8opulation growth• Technological change

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The "upply of 2inancial Capital

The +uantit" of financial capital supplied results frompeople s saving decisions.

The higher the interest rate the greater is the +uantit"of saving supplied.

The main influences on the suppl" of saving are:

• 8opulation• Average income• E%pected future income

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2inancial 0ar$et E9uilibrium and the !nterestRate

1inancial market e+uilibrium occurs when the interestrate has ad usted to make the +uantit" of capitaldemanded e+ual the +uantit" of capital supplied.

1igure ,-.= on the ne%t slide illustrates financial markete+uilibrium.

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The demand for financialcapital is KD and thesuppl" of financial capital isKS .&% The e+uilibrium interest

rate is = percent a "ear.

)% The e+uilibrium +uantit"of financial capital is/455 billion.

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&-% A.# A.# .AT:RA RE"/:RCE"

All natural resources are called land and the" fall intotwo categories:

• Renewable

• &onrenewable

Renewable natural resources

&atural resources that can be used repeatedl".

.onrenewable natural resources

&atural resources that can be used onl" once and thatcannot be replaced once the" have been used.

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The 0ar$et for and ;Renewable .aturalResources<

The lower the rent the greater is the +uantit" of landdemanded.

The suppl" of a particular block of land is perfectl"inelastic.

1igure ,-.? illustrates this market for land.

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The demand curve for a ,5!acre block of land is D andthe suppl" curve is S .

E+uilibrium occurs at a rentof /, 555 an acre per da".

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Economic Rent and /pportunity Cost

Economic rent

The income received b" an" factor of production overand above the amount re+uired to induce a given+uantit" of the factor to be supplied.

The income that is re+uired to induce the suppl" of agiven +uantit" of a factor of production is its opportunitycost >the value of the factor of production in its ne%tbest use.

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1igure ,-.- shows how theincome of a factor ofproduction divides betweeneconomic rent andopportunit" cost.

&% 8art of the income isopportunit" cost @the red area .

)% 8art is economic rent@the green area .

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The "upply of a .onrenewable Resource

Bver time the +uantit" of a nonrenewable resourcedecreases as it is used up.

$ut the known +uantit" of a natural resource increasesbecause advances in technolog" enable ever lessaccessible sources of the resource to be discovered.

7sing a natural resource decreases its suppl" whichcauses price to rise.

&ew discoveries increase suppl" which cause prices tofall.

ch 18 lecture

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