Topic 16- Markets for Factors of Production

Question 1

Factors of Production

Answer 1

Land
labour
capital
enterprise

THESE ARE THE INPUTS

Question 2

Purchase price

Rental price

Answer 2

Price paid to own the factor of production

price paid to use that factor of production temporarily

Question 3

Labour services

Answer 3

Work efforts people supply to produce foods and services

Question 4

Wage rate

Answer 4

price of labour services

Question 5

Are labour markets competitive?

Answer 5

YES! many buyers and sellers

Question 6

Capital?
What market are they sold in, what type of market is this

Answer 6

Tools instruments machines buildings

sold in the goods market, this is a rental market!

Question 7

What is the wage rate determined by

Answer 7

SUPPLY AND DEMADN

Question 8

Land services and natural resources

what market type?

Answer 8

Rental market, sold at the rental rate

Question 9

What determines the prices of non-renewable natural resources?

Answer 9

Global commodity markets

Question 10

Entreprenurship market?

Answer 10

DOES NOT EXIST!!!
Entrepreneurs receive the profit or
bear the loss that results from their
business decisions

Question 11

Derived demand

Answer 11

The demand for a factor of production, it is DERIVED from teh demand for the goods the factor will produce!

Question 12

Value of marginal product or the Marginal Revenue Product

Answer 12

The VALUE a firm has of hiring one more unit of factor of production (land labour capital)

VMP=Price x Marginal Product
MRP= Price x Marginal Product

Question 13

How to calculate Value of MarginaL product

Answer 13

Same as the Marginal Revenue Product

PRICE X MARGINAL PRODUCT

Question 14

How to calculate Marginal Revenue Product

Answer 14

SAME as Vale of Marginal product

PRICE X MARGINAL PRODUCT

Question 15

How do you calculate marginal product

Answer 15

Total Product 2- Total Product 1/ Labour 2- Labour 1

Question 16

What does VMP or MRP tell us?

Answer 16

How much is that extra worker/fop worth to a firm

THIS ISTHE EXTRA REVENUE THE FIRM EARNS BY HIRING ONE MORE WORKER

Question 17

What tells us how much an additional worker costs to a firm

Answer 17

Wage Rate

Question 18

What determines the total quantity of labour demanded by a firm

Answer 18

VMP and Wage rate together

Question 19

VMP and Wage rate relation

Answer 19

VMP=Wage rate, firm has maximized profit
VMP> Wage rage, firm should add one more worker and increase profit
VMP<Wage rate, firm should fire one more worker

Question 20

How to calculate market demadn for labour

Answer 20

obtained by summing the quantities of labour demanded by all firms at each wage rate!!!

bc each firms demadn curve slopes downard, so does the market demand curve!

Question 21

What shifts the market demand for labour

1. the output price
   2.tech change

Answer 21

1. the output price, if the output price of a good increases, the value of one more marginal product of that good increases, which creates MORE DEAMND (Shift right)
2. Tech change, new tech can create more demand for some labour, decrease it for others

Question 22

Factors that can shift market demand curve for labour
3. The price of others factors of prod
4. changes in # of firms

Answer 22

3. if the price of using other capital decreases compared to wage rate, firms buy more capital and less labour!!!!!
4. increases in # of firms, increases the demand for labour!

Question 23

How do individuals allocate their time?

Answer 23

Between working and leisure!!

Question 24

Reservation wage

Answer 24

is the lowest wage rate for which the individual is willing to supply labour

Question 25

What does the supply of labour curve look like!

Answer 25

Like a backwards c, first it increases past the reservation wage, but as the wage rate keeps increasing it bends backwards because you pass the indviduals max possibel hours of work

Question 26

Why does the labour supply curve bend backwards? 1. substitution effect 2. income effect

Answer 26

At wage rate BELOW max hours of work wanted, the higher the wage, the more quantity of labour sub effect describes how an individual responds to the increasing opp cost of leisure, AT LOW WAGE RATES: sub effect dominates income effect, so a rise in the wage rate increases the quantity of labour

Question 27

Income effect

Answer 27

Past the max hours of work possible point, the income effect dominates the substitution effect, and curve bends backwards as income increases, consumers buy more of most goods- MORE OF LEISURE WHICH IS A NORMAL GOOD!!!

Question 28

Labour supply curve, where is there a substituion effect, and where is there a income effect

Answer 28

rates below the max hours possible, substitution, prices after Income (curve bends back)

Question 29

Individual labour supply curve vs market supply curve

Answer 29

Market supply curve is the horizontal sum of all individual supply curves SO it SLOPES UPWARDS NEVER BACKWARDS! individuals supply curve bends backwards

Question 30

What sifts the market supply curve for labour

Answer 30

1. changing population (Shift left) 2. changing demographics (aging pop or women woopwoop) 3. changes in alternatiove opps

Question 31

What does labour market equilibrium determine

Answer 31

the wage rate and the number of workers employed!!! Wage eventually equals the value of the marginal product W=VMP!

Question 32

What is the demand for land based on

Answer 32

the VMP of land

Question 33

THINK THIS THROUGH AYUSHI- WHAT SHIFTS THE MARKET DEMAND FOR LABOUR????? WHAT DOES NOT?

Answer 33

The formula for VMP is VMP=Px MP So if price of output changes or if the marginal product of labour changes ofc VMP WILL CHANGE but a change in the wage rate DOES NOT CHANGE THE VMP!!!!!!!! BC VMP must be EQUAL to the WAGE RATE

Question 34

IMPORTANT THING TO REMEMBER ABOUT HTE VMP FORMULA

Answer 34

P X VMP PRICE OF OUTPUTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT X VMP