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Chapter 13 Introduction to the Factor Markets

Chapter 13 Introduction to the Factor Markets. Factors of Production Definitions. Derived demand suggests that a factor of production is demanded for its contribution to the production process.

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Chapter 13 Introduction to the Factor Markets

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  1. Chapter 13 Introduction to the Factor Markets

  2. Factors of Production Definitions • Derived 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.

  3. 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.

  4. Demand for Factors of Production • 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.

  5. MRP Curve • The 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.

  6. 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

  7. MRP Theory of Wages 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.

  8. 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.

  9. What influences MRP? • The productivity of the factor • The MR/selling price of the output • The law of demand (elastic/inelastic demand curve)

  10. 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?

  11. MRP in Perfectly Competitive Markets In perfect competition: • The price for the individual firm’s output is constant • MPP x price = MRP

  12. 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 MRP • In a market structure that has a downward sloping demand curve, MRP = MPP x MR.

  13. What Influences MPP? 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 factors • Training/education provided for the factors • Expertise of the entrepreneur • Law of diminishing marginal returns

  14. Supply Price and Transfer Earnings • 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.

  15. 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.

  16. Factors Affecting Transfer Earnings • Productivity of the factor • Length of time

  17. Alfred Marshall (1842–1924) • Utility theory • Quasi economic rent • Power of competition • Developed economic concepts

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