1. 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.

2. Introduction to Factor Markets
Chapter 20: Factor Markets and the Distribution of Income (pages )

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

4. Circular Flow Diagram

5. 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

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

7. 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

8. 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

9. 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

10. Marginal Revenue Product
Wage rate, MRP
Marginal Revenue Product

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

12. 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

13. 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)

14. Assume: Wage rates are $8 per workerL 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

15. 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)

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