© Edco 2012. Positive Economics Chapter 13 Introduction to the Factor Markets

© Edco 2012. Positive Economics

Chapter 13Introduction to the

Factor Markets


Factor Definition Return/payment Example: Pat’s Deli

Land Anything supplied by nature that helps in the production

of wealth

Rent Physical land that the deli is

built onLabour Human activity directed

towards the production of wealth

Wages Staff to cook and serve customers

Capital Anything man made that helps in the production of

wealth

Interest Pat’s Deli uses fridges, ovens

Enterprise

A person who combines the other factors of production, takes the initiative and risk

in setting up a firm

Profit/loss Pat the risk taker


Factors of Production DefinitionsDerived demand suggests that a factor of

production is demanded for its contribution to the production process.

A specific factor of production is one that is so specialised that it doesn’t have many different uses.

A non-specific factor of production can have many different uses.


Factors of Production Definitions(Continued)

Occupational mobility is the ease with which a factor of production can move from one occupation to another.

Geographical mobility is the ease with which a factor of production can move from one area to another.


Demand for the factors of production is the amount of a factor that will be used and will be determined by its contribution to the business and the price that has to be paid for that factor.

The marginal revenue productivity of a

factor is the extra revenue earned when an additional unit of a factor of production is employed.

Demand for Factors of Production


MRP CurveThe MRP curve is the demand curve for

labour. It shows the quantity of labour that will be demanded at each wage rate.

The MRP curve of any of the four factors of production is its demand curve.


Why does the MRP curve slope downwards from left to right?

The law of diminishing returns – As more workers are employed, their marginal product will begin to decline. As a result, the MRP of each extra worker is less than the previous employee.

The law of demand


The MRP theory of wages states that

each worker is paid an amount equal to the additional revenue that is received from the employment of the last worker.

MRP Theory of Wages


Labour Hoarding On occasion, a firm may continue to employ

labour even though it is unprofitable to do so. This can occur because:

Management may feel that demand is likely to improve and more workers would be required in the future.

Retaining existing workers is easier than retraining new staff.


What influences MRP?The productivity of the factor

The MR/selling price of the output

The law of demand (elastic/inelastic demand curve)


Is MRP (price of a factor of production) easy to calculate?

MRP is quite difficult to measure: How do you value the contribution of a

care assistant in a hospital or the contribution of a policeman?

If capital and labour are required to carry out a task, how do you allocate the MRP to either capital or labour?

How do you measure the MRP of a service not sold on the market?


MRP in Perfectly Competitive Markets

In perfect competition:

The price for the individual firm’s output is constant

MPP x price = MRP


MRP and Imperfect Competition and Monopoly

In both imperfect competition and monopoly:

The price of goods needs to be lowered in order to sell a higher quantity

MPP x AR will not equal MRPIn a market structure that has a

downward sloping demand curve, MRP = MPP x MR.


Marginal physical product is the extra output produced when an additional unit of factor of production is employed. It is influenced by:

Quality/specialised nature of the factorsTraining/education provided for the factorsExpertise of the entrepreneurLaw of diminishing marginal returns

What Influences MPP?


The supply price of a factor of production is the minimum payment necessary to bring a factor into use and maintain it in that particular use.

Transfer earnings refer to the earnings of a factor of production in the next best alternative employment OR what a factor must receive to keep it in its present use and prevent it from transferring to another use.

Supply Price and Transfer Earnings


Economic Rent and Quasi Economic Rent

Economic rent refers to any earnings of a factor above its supply price.

Quasi economic rent refers to economic rent of a temporary nature.


Factors Affecting Transfer Earnings

Productivity of the factor

Length of time


Alfred Marshall (1842–1924)

Utility theory

Quasi economic rent

Power of competition

Developed economic concepts

Documents

© Edco 2012. Positive Economics Chapter 13 Introduction to the Factor Markets