1. The factor market – The Labour market
31st March 2019

2. Factor Market
Factor Markets refers to the markets where services of the factors of production are bought and sold
Labor Markets
Capital Markets
The markets for raw materials
The market for management and entrepreneurial resources.
The demand for and supply of factors
Rent
Wages
Interest
Economic profit

3. Factor Market The demand for a factor is derived (Indirect)
There is demand for land because there is demand for rice.
The supply of factors of production
Depends on the system of property rights
The toil trouble involved in the work
(Depends on the leisure preference)

4. Factor Pricing
In the free market (no government intervention and trade union pressure) the price of the factors of production are dependent on supply and demand.
Output determination  commodity pricing
Income distribution factor pricing
Two types of income distribution
Functional distribution of income (Micro)
Personal distribution of income (Macro)

5. Functional distribution
Each factor is paid on the basis of the function performed by it.
Land owners – Rent
Workers – Wage
Suppliers of financial capital – interest
Entrepreneurs – profit.
Two main theories of factor price determination
Supply Demand Theory
The marginal productivity theory of factor demand

6. Supply – Demand Theory When wages increase Labor increases
When Rent Increases
More people give their property for rent

7. The marginal productivity theory of factor demand
This suggests that an individual firm pays a factor on the basis of its Marginal product
MR = MC
However, there are other factors. A rupee spent on labor cannot be spent on capital
Therefore firms have to choose their best option.
This it the law of EQUI-MARGINAL RETURN

8. Rent Commercial Rent – Payment for the use of property
Economic Rent – Is the reward for the uses of the services of the land.
The Supply of the land is perfectly inelastic because the quantity available is fixed and determined by nature.
Supply has no influence in the determining of rent.
Demand is the only determinant of rent
Perfectly inelastic – so as demand increases/decreases rent will increase/decrease.
Economic Rent offers no incentive system.
Since Land is a gift of nature , any payment received by the owner is called PURE or ECONOMIC RENT

9. Interest
You give me Rs 2000 today and in a year I will give you Rs 500 as interest and the original Rs.2000
(500/2000)*100 = 25%
Bank interest is 8%
So my economic profit is (25-8) = 17%
Banks sets Savings rates and Borrowing rates – and the bank keeps the difference as revenue.
Rate of Interest = Interest *100
Principal

10. Profit
Profit is a return on entrepreneurial ability or a reward for risk taking.
Economic role of profits
Profits as a signal to a resource owner
Profits are economics signals letting people know to enter markets or in cases of losses to leave markets.
Profits are motive for efficiency
Gives incentive to firms to reduce cost
Profits as reward
The prospect of earning rewards are the driving force behind development
Innovation
Profit is the prime mover of capitalistic economies.

11. Wages The wage rate refers to the earning per hour of labor.
The wage rate divide by the price index gives the “Real Wage Rate”
The level of real wages depends on the productivity of labor
Real wages are higher
The greater the amount of capital available (hedge fund managers)
The more technology available (scientists)
The availability of natural resources (oil)

12. Wages
By adding each firms demand for labor we get the Market demand for labor
The market supply for labor depends on the
Size of the population
The proportion of the population in the labor force
The state of the economy
The level of real wages
Competitive equilibrium real wage rate is determined by the intersection of the market demand and supply curves.
Then the firm hires labor until the MR = the wage rate

13. Labor Unions Labor Unions try to increase wages in 3 ways
They try to increase the demand for labor by increasing productivity
By advertising union made products
By lobbying for the restriction of imports
Increase wage by restricting the supply of labor
High initiation fees
Long apprenticeships
Require that firms higher only union workers.
Increase wages by bargaining with employees
Threats of strikes
Go slow campaigns.

14. Minimum Wages

15. Minimum Wages Group Discussion
What effect does minimum wages have on the economy?
Should Sri-Lanka have a minimum wage? If no, why not? If yes, explain and how much should it be set at?

16. CEO Salaries
Cash/Base Salaries
Bonuses
Stock Options
Stock Ownership