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

2. © Edco 2012. Positive Economics FactorDefinitionReturn/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 on Labour 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 EnterpriseA person who combines the other factors of production, takes the initiative and risk in setting up a firm Profit/lossPat the risk taker

3. © Edco 2012. Positive Economics 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.

4. © Edco 2012. Positive Economics 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.

5. © Edco 2012. Positive Economics 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

6. © Edco 2012. Positive Economics 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.

7. © Edco 2012. Positive Economics 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

8. © Edco 2012. Positive Economics 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

9. © Edco 2012. Positive Economics 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.

10. © Edco 2012. Positive Economics What influences MRP? The productivity of the factor The MR/selling price of the output The law of demand (elastic/inelastic demand curve)

11. © Edco 2012. Positive Economics 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?

12. © Edco 2012. Positive Economics MRP in Perfectly Competitive Markets In perfect competition: The price for the individual firm’s output is constant MPP x price = MRP

13. © Edco 2012. Positive Economics 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.

14. © Edco 2012. Positive Economics 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 What Influences MPP?

15. © Edco 2012. Positive Economics 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

16. © Edco 2012. Positive Economics 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.

17. © Edco 2012. Positive Economics Factors Affecting Transfer Earnings Productivity of the factor Length of time

18. © Edco 2012. Positive Economics Alfred Marshall (1842–1924) Utility theory Quasi economic rent Power of competition Developed economic concepts