1. Factors of Production
Lesson 18
Sections 69, 70

2. Factor Market and Demand (69)
The factor market includes Land, Labor, and Capital.
Land: The space needed to do work, as well as the natural resources of the Earth.
Labor: This is the work produced by people, as opposed to the work produced by robots or other means.
Capital: Money resources, as well as machines, buildings, and other assets (cars, computers, etc.)
Entrepreneurship: Innovation and Risk Taking
Physical Capital and Human Capital
Derived Demand
Increased demand for one factor leads to increased demand for other factors
Factor Distribution of Income
Income derived from factors
Land – rent
Labor – wages
Capital - profit

4. Marginal Productivity and Factor Demand
Value of the Marginal Product
Marginal product of labor
The increase in output from employing one more worker
Synergy
Figure The Production Function for George and Martha’s Farm Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

5. Shifts In the Factor Demand Curve
Movement of the factor demand curve can be caused by:
Changes in the price of goods
Changes in the supply of other factors
Changes in technology

6. Compensation
While the chart shows that by far the largest part of earnings goes to wages, but the chart is misleading because who gets the wages?
Top .01% = 5%
0.01% to 0.1% = 5.3%
0.1% to 0.5% = 6.5%
0.5% to 1% = 4.1%
1% to 5% = 15.6%
5% to 10% = 11.7%
Bottom 90% = 51.8%

7. The Markets for Land and Capital (70)
Demand and Supply
Compare the cost of an additional unit versus the marginal product
Rental Rate: land or capital cost for a given time

8. Marginal Productivity Theory
The Marginal Productivity Theory of Income Distribution is about how we determine how much is paid to each factor of production. Assuming a competitive market, each factor is paid the value of the output of the last unit of the factor employed in the factor market as a whole, the equilibrium value).