# 1 CHAPTER 12 Factor Markets and the Distribution of Income PowerPoint® Slides by Can Erbil © 2004 Worth Publishers, all rights reserved.

## Presentation on theme: "1 CHAPTER 12 Factor Markets and the Distribution of Income PowerPoint® Slides by Can Erbil © 2004 Worth Publishers, all rights reserved."— Presentation transcript:

2 What you will learn in this chapter: Factor distribution of income Marginal productivity theory of income distribution Wage disparities and discrimination Time allocation and individual labor supply

3 Factor Distribution of Income in the United States in 2003

4 The Production Function for George and Martha’s Farm

5 The Value of the Marginal Product Curve P x MPL or P x MPP (AP) = VMPL or MRP (AP)

6 Equilibrium in the Labor Market Each firm will hire labor up to the point at which the value of the marginal product of labor is equal to the equilibrium wage rate. VMPL = Wage or MRP = Wage (AP) In equilibrium, the marginal product of labor will be the same for all employers. So the equilibrium (or market) wage rate is equal to the equilibrium value of the marginal product.

7 Shifts of the Value of the Marginal Product Curve (Derived Demand Curve). If the price of the good that is produced with labor changes, so will the value of the marginal product of labor.

8 All Producers Face the Same Wage Rate

9 Equilibrium in the Labor Market The market labor demand curve is the horizontal sum of the individual labor demand curves of all producers. Labor is paid its equilibrium value of the marginal product, the value of the marginal product of the last worker hired in the labor market as a whole.

10 Wage Disparities in Practice

11 Earnings Differentials by Education, Gender, and Ethnicity, 2002

12  Market power  Compensating Differentials  Danger/Unattractiveness of Job  Talent/Human Capital  Unions  Collective Bargaining  Efficiency-wage model  Nanny Example  Discrimination Marginal Productivity and Wage Inequality

13 The Individual Labor Supply Curve If the income effect dominates, a rise in the wage rate can actually cause the individual labor supply curve to slope downward!!!

14 The End of Chapter 12 coming attraction: Chapter 13: Efficiency and Equity