Factor Markets: markets in which factors of production are bought + sold
Factor Prices: prices in factor markets
FACTORS OF PRODUCTION
1. Labor: work done by human beings
2. Land: resources provided by nature
3. Capital
a. Physical - manufactured equipment/resources
i. ex. buildings, tools, machines
b. Human - improvement in labor created by edu + knowledge
4. Entrepreneurship: risk-taking activities
a. Bring resources together for innovative production
Derived demand: demand for the factor is derived from demand for firm's output
*Factor markets are where most of us get income
● Wages + salaries = income from selling labor
● Own stock in a company = physical capital
● Renting out land
● Profits for successful entrepreneurs
Factor distribution of income: how total income of the economy is divided among land, labor,
capital, entrepreneurship
● Determined by factor prices
Marginal Productivity and Factor Demand
● Most factor markets are perfectly competitive
, ○ Buyers + sellers are price-takers
○ Marginal cost for employer = wage
○ Marginal benefit for employer = marginal product of labor (MPL)
■ Marginal product = marginal physical product (MPP)
Price-taking firm's optimal output rule: a firm's output is maximized by producing where
MC = MP
W = wage rate (inc. in cost from employing another work)
P x MPL = benefit from employing another work (price of product x how much is
produced)
VMPL = P x MPL = value of marginal product of labor
**If VMPL > W, hire another worker**
VMPL = W = PROFIT-MAX = OPTIMAL POINT
VMPL = PRODUCER'S INDIVID. DEMAND CURVE
FOR ALL FACTORS OF PRODUCTION, keep adding more units until
MP of the last unit = factor's price
Factor Prices: prices in factor markets
FACTORS OF PRODUCTION
1. Labor: work done by human beings
2. Land: resources provided by nature
3. Capital
a. Physical - manufactured equipment/resources
i. ex. buildings, tools, machines
b. Human - improvement in labor created by edu + knowledge
4. Entrepreneurship: risk-taking activities
a. Bring resources together for innovative production
Derived demand: demand for the factor is derived from demand for firm's output
*Factor markets are where most of us get income
● Wages + salaries = income from selling labor
● Own stock in a company = physical capital
● Renting out land
● Profits for successful entrepreneurs
Factor distribution of income: how total income of the economy is divided among land, labor,
capital, entrepreneurship
● Determined by factor prices
Marginal Productivity and Factor Demand
● Most factor markets are perfectly competitive
, ○ Buyers + sellers are price-takers
○ Marginal cost for employer = wage
○ Marginal benefit for employer = marginal product of labor (MPL)
■ Marginal product = marginal physical product (MPP)
Price-taking firm's optimal output rule: a firm's output is maximized by producing where
MC = MP
W = wage rate (inc. in cost from employing another work)
P x MPL = benefit from employing another work (price of product x how much is
produced)
VMPL = P x MPL = value of marginal product of labor
**If VMPL > W, hire another worker**
VMPL = W = PROFIT-MAX = OPTIMAL POINT
VMPL = PRODUCER'S INDIVID. DEMAND CURVE
FOR ALL FACTORS OF PRODUCTION, keep adding more units until
MP of the last unit = factor's price
