Warm-Up Draw a correctly-labeled firm in monopolistic competition in long-run equilibrium. Mark the equilibrium P and Q for both monopolistic and perfect competition.

Introduction to Factor Markets Chapter 20: Factor Markets and the Distribution of Income (pages 510-519)

Types of Markets Product Markets – finished goods and services Factor Markets – inputs and resources that produce goods and services

Circular Flow Diagram

Factors of Production Land – resources from nature Labor – work done by people Capital – tools used in production Physical capital: tools, machines Human capital: skills and training Entrepreneurship – talent for risk

MB = MC Factor Demand Factor demand is DERIVED Based on value created by each factor Compares value to cost Basic rule: MB = MC

Labor TP MPL MRP 1 8 $2 * 8 = $16 2 18 10 $20 3 26 $16 4 32 6 $12 5 36 $8 38 $4 Assume: Price = $2; Wage rates =$8 per worker

MRP > W MRP = W MRP < W How do I decide?!? Hire workers if… Stop hiring when… Don’t hire if… MRP > W MRP = W MRP < W

L TP MPL MRP 1 19 $20 * 19 = $380 2 36 17 $340 3 51 15 $300 4 64 13 $260 5 75 11 $220 6 84 9 $180 7 91 $140 8 96 $100

Marginal Revenue Product Wage rate, MRP Marginal Revenue Product

MRP Curve Sound familiar? If wage   hire fewer workers If wage   hire more workers Sound familiar?

Shift vs. Movement Changes in wage = MOVEMENT Other changes = SHIFT Primary reasons for shift include: Change in prices of goods Change in supply of other factors Change in technology

Change in Prices of Goods (a) An Increase in the Price of Wheat (b) A Decrease in the Price of Wheat Wage rate Wage rate Market wage rate A B C A $200 $200 MRP1 MRP2 MRP3 MRP1 5 8 2 5 Quantity of labor (workers) Quantity of labor (workers)

Assume: Wage rates are $8 per worker L TP MPL MRP (P=$2) MRP (P=$4) 1 8 $16 $32 2 18 10 $20 $40 3 26 4 32 6 $12 $24 5 36 $8 38 $4 Assume: Wage rates are $8 per worker

Changes in Supply of Factors Similar to changes in prices  in factors   in productivity  Shift to the right ( in MRP)  in factors   in productivity  Shift to the left ( in MRP)

Changes in Technology  Technology   in productivity Productive workers  MRP Leads to shift to the right Technology actually ADDS jobs