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Factors of Production Lesson 18 Sections 69, 70.

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Presentation on theme: "Factors of Production Lesson 18 Sections 69, 70."— Presentation transcript:

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

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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).


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