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Factor markets and income distribution principles of microeconomics PDF

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FACTOR MARKETS AND
INCOME DISTRIBUTION

PRINCIPLES OF MICROECONOMICS

Lecture 8

Prepared by: Minh Huynh, M.Econ.

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
Contents
3

One

Markets for Factors of
Production

Two

Determinants of Equilibrium
Wages
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
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
Two Assumptions:
1. We assume all markets are competitive.

The typical firm is a price taker

oin the market for the product it produces

oin 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
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
Cost of hiring another worker:
the wagethe 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
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