AP Economics Mr. Bernstein Module 69: Factor Markets: Introduction and Factor Demand December 18, 2014

AP Economics Mr. Bernstein Factors of Production AKA “resources” or “inputs” Land Resources provided by nature Labor Work done by humans Capital Physical Capital such as tools, buildings, machinery, etc. Human Capital – improvement in labor due to education, training…may be the most important factor in modern econ. Entrepreneurship Talent for bringing together resources for innovative production 2

AP Economics Mr. Bernstein Factor Prices Factor prices allocate resources among producers The demand for a factor of production is a derived demand (derived from the output being producted) Factor Distribution of Income: Payments to labor are most of economy’s total income (71% ) 3

AP Economics Mr. Bernstein Marginal Productivity and Factor Demand MP = Marginal Product of one additional unit ie MP L is additional output from hiring one more worker VMP = Value of Marginal Product ie VMP L is additional value from hiring one more worker; = MP L x P VMP curve is the demand curve for a factor If a unit of labor costs W, the Profit-Maximizing Rule is to hire worker if VMP L >= W Law of Demand applies in factor markets 4

AP Economics Mr. Bernstein What Causes Shifts in Factor Demand Curves? Change in price of goods If price of product rises, VMP also rises Example: NFL players worth more if league’s TV package rises Example: Airline pilot is worth less as ticket prices fall Labor demand is derived from product demand Change in supply of other factors Factors are often paired (ie labor and capital) so increase in supply of one increases VMP of the other Change in technology Advances in technology increase VMP 5