Terms in this set (32)
Investment in goods that are used to produce other goods in the future. Examples include machinery, plant and equipment, new technology, factories and buildings.
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.
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.
Diminishing returns to land
A situation in which the increase in output due to a unit increase in land declines with increasing land input; a decreasing marginal product of land
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.
Entrepreneur's demand for scarce factors of production used by businesses, such as natural resources, human resources, and capital resources; this is derived demand.
Factor distribution of income
The division of total income among land, labor, capital, and entrepreneurship
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.
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.
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.
The unit cost of using a factor of production, such as land or physical capital. The factor prices associated with each factor of production are:
- Labor -
- Land -
- Capital - interest*
- Enterprise - profit*
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 hectare of land that is added to the production process increases output by more than the the previous unit of land did.
The quantity of output per unit of land (e.g., per hectare) over a given time period.
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.
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., an industrial oven) is employed.
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 purchasing a unit of land (explicit and implicit costs) so that output (e.g., bushels of wheat) can be increased.
The increase in total output that arises from an additional unit of input.
Maximizing profit when employing factors or production
The firm chooses the level of resource employment (e.g. land) at which the value of the marginal product of land is equal to the market rental rate.
The value of the marginal product curve of a factor is the producer's individual demand curve for that factor.
Quantity of output per unit of input; e.g., the productivity of land (bushels of wheat per hectare).
Relationship between price and value of marginal product of land
If P changes, VMP Land = P × MP Land will change at any given level of land use; e.g., ↑P = ↑VMP Land and = ↑P × MP Land
Total output produced by a firm.
Value of the marginal product of land
The extra value ($) of output generated by employing one more unit of land.
VMP Land/Capital < R
Firm will continue to hire more units of land/capital to maximize profits; e.g., an additional hectare of land costs the firm an additional $20,000 (the rental rate) and enables the firm to produce $22,000 more wheat.
VMP Land/Capital = R
The profit maximizing level of land/capital employment.
VMP Land/Capital > R
Firm will reduce units of labor to maximize profits; e.g., an additional hectare of land costs the firm an additional $20,000 (the rental rate) and enables the firm to produce only $16,000 more wheat.
Diminishing returns to capital
A situation in which the increase in output due to a unit increase in capital declines with increasing capital input; a decreasing marginal product of capital
The quantity of output per unit of capital (e.g., per industrial machine) over a given time period.
Marginal productivity theory of income distribution
According to this theory, each factor is paid the value of the output generated by the last unit of that factor employed in the factor market as a whole — its equilibrium value of the marginal product.
Relationship between price and value of marginal product of capital
If P changes, VMP Capital = P × MP Capital will change at any given level of capital use; e.g., ↑P = ↑VMP Capital and = ↑P × MP Capital
The cost, explicit or implicit, of using a unit of that asset (land or capital) for a given period of time
Value of the marginal product of capital
The extra value ($) of output generated by employing one more unit of capital.