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Factor markets and income distribution principles of microeconomics PDF

   

Added on  2022-01-22

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FACTOR MARKETS AND
INCOME DISTRIBUTION
PRINCIPLES OF MICROECONOMICS
Lecture 8
Prepared by: Minh Huynh, M.Econ.
1
Factor markets and income distribution principles of microeconomics PDF_1

In this lecture, look for the answers to these
questions:
• What determines a competitive firm’s demand for
labor?
• How does labor supply depend on the wage? What
other factors affect labor supply?
• How do various events affect the equilibrium wage
and employment of labor?
• How are the equilibrium prices and quantities of
other inputs determined?
• What are the determinants of equilibrium wages.
2
Factor markets and income distribution principles of microeconomics PDF_2

Contents
3
One
• Markets for Factors of
Production
Two
• Determinants of Equilibrium
Wages
Factor markets and income distribution principles of microeconomics PDF_3

Factors of production: the inputs used to produce
goods and services.
Labor
Land
Capital: the equipment and structures used
to produce goods and services.
Prices and quantities of these inputs are
determined by supply & demand in factor markets.
4
MARKETS FOR FACTORS OF PRODUCTION
Factor markets and income distribution principles of microeconomics PDF_4

The demand for a factor of production is a
derived demand.
A firm’s demand for a factor of production is
derived from its decision to supply a good in
another market.
5
MARKETS FOR FACTORS OF PRODUCTION
Factor markets and income distribution principles of microeconomics PDF_5

Two Assumptions:
1. We assume all markets are competitive.
The typical firm is a price taker
o in the market for the product it produces
o in the labor market
2. We assume that firms care only about maximizing
profits.
Each firm’s supply of output and demand for
inputs are derived from this goal.
6
MARKETS FOR FACTORS OF PRODUCTION
Factor markets and income distribution principles of microeconomics PDF_6

Farmer Jack sells rice in a perfectly competitive
market.
He hires workers in a perfectly competitive labor
market.
When deciding how many workers to hire,
Farmer Jack maximizes profits by thinking at the
margin:
If the benefit from hiring another worker
exceeds the cost, Jack will hire that worker.
7
Our Example: Farmer Jack
Factor markets and income distribution principles of microeconomics PDF_7

Cost of hiring another worker:
the wage – the price of labor
Benefit of hiring another worker:
Jack can produce more rice to sell,
increasing his revenue.
The size of this benefit depends on Jack’s
production function: the relationship between
the quantity of inputs (numbers of workers) used
to make a good and the quantity of output of
that good (kilos of rice).
8
Our Example: Farmer Jack
Factor markets and income distribution principles of microeconomics PDF_8

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