Terms in this set (28)
Factor of production
Any resource used in the productive process of producing goods and services; these are land, labor, capital, and enterprise.
Payments made for the use of the factors of production: land = rent, labor = wages, capital = interest, enterprise = profits.
Entrepreneur's demand for scarce factors of production used by businesses, such as natural resources, human resources, and capital resources; this is derived demand.
Is demand for a factor of production that occurs as a result of the demand for another good. In essence, the demand for a factor of production by a firm is dependent on the demand by consumers for the product produced by the firm.
A market where factors of production are bought and sold, such as the labor market, the physical capital market, the market for raw materials, and the market for management or entrepreneurial resources.
The unit cost of using a factor of production, such as labor or physical capital. The factor prices associated with each factor of production are:
The natural resources available for production. Some nations have a large amount of a particular natural resource, and so are able to specialise in the extraction and production of it - for example North Sea oil and gas in Britain and Norway.
The human input into the production process. Not all labor is of the same quality. Every person has different skills and qualifications - we call this human capital. When people have more human capital, they are likely to be more productive. This means they can produce more in the same period of time.
Investment in goods that are used to produce other goods in the future. Examples include machinery, plant and equipment, new technology, factories and buildings.
The idea of having ideas and taking risks in setting up or running a business. An entrepreneur is someone involved in taking those risks, perhaps by putting in their money, or having the ideas and the drive to set up or run the business. The reward for being an entrepreneur is profit.
Factor distribution of income
The division of total income among land, labor, capital, and entrepreneurship
The addition to a firm's total costs of production when one more unit of a good is produced; i.e., the additional cost to a firm of hiring a baker (paying her wages) so that output (e.g., number of cakes) can be increased.
Additional benefits received when one more unit of a product is produced. This is the value of the output (e.g., number of cakes) that results when an additional factor of production (e.g., a baker) is employed.
Factor markets are perfectly competitive
Most buyers and sellers of factors are price-takers because they are too small relative to the market to do anything but accept the market price.
The increase in total output that arises from an additional unit of input.
The quantity of output per employee over a given time period.
Quantity of output per unit of input; e.g., the productivity of labor.
Increasing marginal returns to a factor
The increase in total output that arises from an additional unit of input is larger than the increase in output associated with the previous unit of input. For example, each additional worker that is added to the production process increases output by more than the the previous worker did.
Diminishing marginal returns to a factor
The increase in total output that arises from an additional unit of input is less than the increase in output associated with the previous unit of input. For example, each additional worker that is added to the production process increases output by less than the the previous worker did.
Total output produced by a firm.
Value of the marginal product of labor
The extra value ($) of output generated by employing one more unit of labor.
Diminishing returns to labor
A situation in which the increase in output due to a unit increase in labor declines with increasing labor input; a decreasing marginal product of labor
Maximizing profit when employing factors or production
The firm chooses the level of resource employment (e.g. labor) at which the value of the marginal product of labor is equal to the market wage rate. For example, at a wage rate of $200 the profit-maximizing level of employment is 5 bakers (employing a 6th worker costs the bakery more in wages than the value of the 6th baker's production).
The value of the marginal product curve of a factor is the producer's individual demand curve for that factor.
What causes factor demand curves to shift?
There are three main causes:
- Changes in the prices of goods
- Changes in the supply of other factors
- Changes in technology
Relationship between price and value of marginal product of labor
If P changes, VMPL = P × MPL will change at any given level of employment; e.g., ↑P = ↑VMPL = ↑P × MPL
VMPL < W
Firm will continue to hire more units of labor to maximize profits; e.g., an additional baker costs the firm an additional $200 in wages and enables the firm to produce $220 more of cakes.
VMPL > W
Firm will reduce units of labor to maximize profits; e.g., the last unit of labor (e.g., the baker) costs the firm an additional $200 in wages but enables the firm to produce $180 more of cakes.
VMPL = W
The profit maximizing level of labor employment.