1. 1 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production

2. 2 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production

3. 3 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production 16 The Markets for Labor and Other Factors of Production Fernando Quijano Prepared by: CHAPTER The Yankees were able to offer Sabathia a better contract because of the much higher revenues the team generates from ticket sales, cable television, and broadcast television and radio.

4. 4 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production 16.1The Demand for Labor Explain how firms choose the profit- maximizing quantity of labor to employ. 16.2The Supply of Labor Explain how people choose the quantity of labor to supply. 16.3Equilibrium in the Labor Market Explain how equilibrium wages are determined in labor markets. 16.4Explaining Differences in Wages Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. 16.5Personnel Economics Discuss the role personnel economics can play in helping firms deal with human resources issues. 16.6The Markets for Capital and Natural Resources Show how equilibrium prices are determined in the markets for capital and natural resources. Chapter Outline and Learning Objectives The Markets for Labor and Other Factors of Production CHAPTER 16

5. 5 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Factors of production Labor, capital, natural resources, and other inputs used to produce goods and services. The Markets for Labor and Other Factors of Production

6. 6 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production The Demand for Labor Derived demand The demand for a factor of production; it depends on the demand for the good the factor produces. The Marginal Revenue Product of Labor Marginal product of labor The additional output a firm produces as a result of hiring one more worker. Marginal revenue product of labor (MRP) The change in a firm’s revenue as a result of hiring one more worker. Explain how firms choose the profit-maximizing quantity of labor to employ. 16.1 LEARNING OBJECTIVE

7. 7 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production The Marginal Revenue Product of Labor FIGURE 16-1 The Marginal Revenue Product of Labor and the Demand for Labor The Demand for Labor Explain how firms choose the profit-maximizing quantity of labor to employ. 16.1 LEARNING OBJECTIVE The marginal revenue product of labor equals the marginal product of labor multiplied by the price of the good. The marginal revenue product curve slopes downward because diminishing returns cause the marginal product of labor to decline as more workers are hired. A firm maximizes profits by hiring workers up to the point where the wage equals the marginal revenue product of labor. The marginal revenue product of labor curve is the firm’s demand curve for labor because it tells the firm the profit-maximizing quantity of workers to hire at each wage. For example, using the demand curve shown in this figure, if the wage is $600, the firm will hire 4 workers.

8. 8 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production TABLE 16-1 The Relationship between the Marginal Revenue Product of Labor and the Wage WHEN …THE FIRM … MRP > W,should hire more workers to increase profits. MRP < W,should hire fewer workers to increase profits. MRP = W, is hiring the optimal number of workers and is maximizing profits. The Marginal Revenue Product of Labor The Demand for Labor Explain how firms choose the profit-maximizing quantity of labor to employ. 16.1 LEARNING OBJECTIVE

9. 9 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production (1) QUANTITY OF LABOR (2) OUTPUT OF iPODS PER WEEK (3) MARGINAL PRODUCT OF LABOR (4) PRODUCT PRICE (5) TOTAL REVENUE (6) MARGINAL REVENUE PRODUCT OF LABOR (7) WAGE (8) ADDITIONAL PROFIT FROM HIRING ONE ADDITIONAL WORKER 00—$200$0—$500— 1661801,080$1,080500$580 21151601,760680500180 31541402,100340500–160 41831202,16060500–440 52021002,000–160500–660 6 211801,680–320500–820 Hiring Decisions by a Firm That Is a Price Maker Solved Problem 16-1 Explain how firms choose the profit-maximizing quantity of labor to employ. 16.1 LEARNING OBJECTIVE YOUR TURN: For more practice, do related problem 1.5 at the end of this chapter.

10. 10 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production The market demand curve for labor is determined by adding up the quantity of labor demanded by each firm at each wage, holding constant all other variables that might affect the willingness of firms to hire workers. The Market Demand Curve for Labor The Demand for Labor Explain how firms choose the profit-maximizing quantity of labor to employ. 16.1 LEARNING OBJECTIVE

11. 11 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Increases in human capital. Human capital The accumulated training and skills that workers possess. Changes in technology. Changes in the price of the product. Changes in the quantity of other inputs. Changes in the number of firms in the market. Factors That Shift the Market Demand Curve for Labor The five most important variables that cause the labor demand curve to shift are the following: The Demand for Labor Explain how firms choose the profit-maximizing quantity of labor to employ. 16.1 LEARNING OBJECTIVE

12. 12 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production The Supply of Labor FIGURE 16-2 The Labor Supply Curve FIGURE 16-3 A Backward-Bending Labor Supply Curve Explain how people choose the quantity of labor to supply. 16.2 LEARNING OBJECTIVE As the wage increases, the opportunity cost of leisure increases, causing individuals to supply a greater quantity of labor. Therefore, the labor supply curve is upward sloping. As the wage rises, a greater quantity of labor is usually supplied. As the wage climbs above a certain level, the individual is able to afford more leisure even though the opportunity cost of leisure is high. The result may be a smaller quantity of labor supplied.

13. 13 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production The market supply curve of labor is determined by adding up the quantity of labor supplied by each worker at each wage, holding constant all other variables that might affect the willingness of workers to supply labor. Increases in population. Factors That Shift the Market Supply Curve of Labor Changing demographics. Changing alternatives. The Market Supply Curve of Labor The Supply of Labor Explain how people choose the quantity of labor to supply. 16.2 LEARNING OBJECTIVE

14. 14 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Equilibrium in the Labor Market FIGURE 16-4 Equilibrium in the Labor Market Explain how equilibrium wages are determined in labor markets. 16.3 LEARNING OBJECTIVE As in other markets, equilibrium in the labor market occurs where the demand curve for labor and the supply curve of labor intersect.

15. 15 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production FIGURE 16-5 The Effect of an Increase in Labor Demand The Effect on Equilibrium Wages of a Shift in Labor Demand Equilibrium in the Labor Market Increases in labor demand will cause the equilibrium wage and the equilibrium level of employment to rise: 1. If the productivity of workers rises, the marginal revenue product increases, causing the labor demand curve to shift to the right. 2. The equilibrium wage rises from W 1 to W.2. 3. The equilibrium level of employment rises from L 1 to L 2. Explain how equilibrium wages are determined in labor markets. 16.3 LEARNING OBJECTIVE

16. 16 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Will Your Future Income Depend on Which Courses You Take in College? Making the Connection Explain how equilibrium wages are determined in labor markets. 16.3 LEARNING OBJECTIVE YOUR TURN: Test your understanding by doing related problem 3.3 at the end of this chapter.

17. 17 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production FIGURE 16-6 The Effect of an Increase in Labor Supply The Effect on Equilibrium Wages of a Shift in Labor Supply Equilibrium in the Labor Market Explain how equilibrium wages are determined in labor markets. 16.3 LEARNING OBJECTIVE Increases in labor supply will cause the equilibrium wage to fall but the equilibrium level of employment to rise: 1. As population increases, the labor supply curve shifts to the right. 2. The equilibrium wage falls from W 1 to W 2. 3. The equilibrium level of employment increases from L 1 to L 2.

18. 18 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Explaining Differences in Wages Baseball Players Are Paid More Than College Professors Don’t Let This Happen to YOU! Remember That Prices and Wages Are Determined at the Margin Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. 16.4 LEARNING OBJECTIVE The marginal revenue product of baseball players is very high, and the supply of people with the ability to play Major League Baseball is low. The result is that the 750 Major League Baseball players receive an average wage of $3,260,000. The marginal revenue product of college professors is much lower, and the supply of people with the ability to be college professors is much higher. The result is that the 663,000 college professors in the United States receive an average wage of $81,000, far below the average wage of baseball players. FIGURE 16-7 YOUR TURN: Test your understanding by doing related problem 4.7 at the end of this chapter.

19. 19 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Technology and the Earnings of “Superstars” Why does Angelina Jolie earn more today relative to the typical actor than stars did in the 1940s? Making the Connection YOUR TURN: Test your understanding by doing related problems 4.10 and 4.11 at the end of this chapter. Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. 16.4 LEARNING OBJECTIVE The increase in the relative incomes of superstars is mainly due to technological advances.

20. 20 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Compensating differentials Higher wages that compensate workers for unpleasant aspects of a job. Compensating Differentials Explaining Differences in Wages Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. 16.4 LEARNING OBJECTIVE

21. 21 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Are U.S. Firms Handicapped by Paying for Their Employees’ Health Insurance? YOUR TURN: Test your understanding by doing related problem 4.18 at the end of this chapter. Did paying for employees’ health care contribute to Chrysler’s bankruptcy in 2009? Making the Connection Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. 16.4 LEARNING OBJECTIVE The equilibrium level of overall compensation in the economy is determined by the supply of and the demand for labor. Fringe benefits (such as health insurance) are just part of that compensation.

22. 22 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Discrimination Economic discrimination Paying a person a lower wage or excluding a person from an occupation on the basis of an irrelevant characteristic such as race or gender. Explaining Differences in Wages Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. 16.4 LEARNING OBJECTIVE

23. 23 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production 1.Differences in education 2.Differences in experience 3.Differing preferences for jobs Differences in Education Some of the difference between the incomes of whites and the incomes of blacks can be explained by differences in education. Discrimination Most economists believe that only a small amount of the gap between the wages of white males and the wages of other groups is due to discrimination. Instead, most of the gap is explained by three main factors: Explaining Differences in Wages Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. 16.4 LEARNING OBJECTIVE

24. 24 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Discrimination Table 16-2 Why Do White Males Earn More Than Other Groups? GROUPANNUAL EARNINGS White males$50,364 White females36,891 Black males36,233 Black females31,114 Hispanic males30,151 Hispanic females26,695 Explaining Differences in Wages Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. 16.4 LEARNING OBJECTIVE

25. 25 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Women are much more likely than men to leave their jobs for a period of time after having a child. Differences in Experience Significant differences between the types of jobs held by women and men is likely a reflection in job preferences. Differing Preferences for Jobs Explaining Differences in Wages Discrimination Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. 16.4 LEARNING OBJECTIVE

26. 26 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production “WOMEN’S JOBS”“MEN’S JOBS” OCCUPATION WEEKLY EARNINGS PERCENTAGE OF WORKERS WHO ARE WOMENOCCUPATION WEEKLY EARNINGS PERCENTAGE OF WORKERS WHO ARE WOMEN Preschool and kindergarten teachers$567 97%Electricians$805 2% Dental assistants50892 Aircraft mechanics889 2 Child care workers36892Aircraft pilots1,358 4 Receptionists48292Fire fighters901 5 Teacher assistants41092Engineering managers1,713 8 Hairdressers42590Aerospace engineers1,55710 Health care support occupations45488Civil engineers1,33711 Maids and housekeeping cleaners36684 Computer software engineers1,45520 Cashiers35674Chief executives1,88226 Table 16-3 “Men’s Jobs” Often Pay More Than “Women’s Jobs” Explaining Differences in Wages Discrimination Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. 16.4 LEARNING OBJECTIVE

27. 27 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Is Passing “Comparable Worth” Legislation a Good Way to Close the Gap between Men’s and Women’s Pay? Solved Problem 16-4 In panel (a), without comparable-worth legislation, the equilibrium wage for electricians is $800, and the equilibrium quantity of electricians hired is L 1. Setting the wage for electricians below equilibrium at $650 reduces the quantity of labor supplied in this occupation from L 1 to L 2 but increases the quantity of labor demanded by employers from L 1 to L 3. The result is a shortage of electricians equal to L 3 – L 2, as shown by the bracket in the graph. Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. 16.4 LEARNING OBJECTIVE In panel (b), without comparable-worth legislation, the equilibrium wage for dental assistants is $500, and the equilibrium quantity of dental assistants hired is L 1. Setting the wage for dental assistants above equilibrium at $650 increases the quantity of labor supplied in this occupation from L 1 to L 3 but reduces the quantity of labor demanded by employers from L 1 to L 2. The result is a surplus of dental assistants equal to L 3 – L 2, as shown by the bracket in the graph. YOUR TURN: For more practice, do related problems 4.15 and 4.16 at the end of this chapter.

28. 28 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production When two people are paid different wages, discrimination may be the explanation. But differences in productivity or preferences may also be an explanation. The Difficulty of Measuring Discrimination Explaining Differences in Wages Discrimination Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. 16.4 LEARNING OBJECTIVE

29. 29 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production FIGURE 16-8 Discrimination and Wages Explaining Differences in Wages Discrimination Panel (b) shows that this increases the supply of pilots to “B” airlines and lowers the wage paid by these airlines from $1,100 to $900. All the women pilots will end up being employed at the nondiscriminating airlines and will be paid a lower wage than the men who are employed by the discriminating airlines. Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. 16.4 LEARNING OBJECTIVE Initially, neither “A” airlines nor “B” airlines discriminates, and as a result, men and women pilots receive the same wage of $1,100 per week at both groups of airlines. “A” airlines then discriminates by firing all their women pilots. Panel (a) shows that this reduces the supply of pilots to “A” airlines and raises the wage paid by these airlines from $1,100 to $1,300.

30. 30 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production 1.Worker discrimination. 2.Customer discrimination. 3.Negative feedback loops. Employers who discriminate pay an economic penalty. Yet before the Civil Rights Act of 1964 many firms continued to discriminate. The three important factors that allowed these companies to operate were: Does It Pay to Discriminate? Explaining Differences in Wages Discrimination Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. 16.4 LEARNING OBJECTIVE

31. 31 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production FIGURE 16-9 The United States is Less Unionized Than Most Other High-Income Countries Labor Unions Explaining Differences in Wages The percentage of the labor force belonging to unions is lower in the United States than in most other high-income countries. Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. 16.4 LEARNING OBJECTIVE Labor union An organization of employees that has the legal right to bargain with employers about wages and working conditions.

32. 32 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production TABLE 16-4 Union Workers Earn More Than Nonunion Workers AVERAGE WEEKLY EARNINGS UNION WORKERS$886 NONUNION WORKERS691 Labor Unions Explaining Differences in Wages Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. 16.4 LEARNING OBJECTIVE

33. 33 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Personnel Economics Personnel economics The application of economic analysis to human resources issues. Should Workers’ Pay Depend on How Much They Work or on How Much They Produce? FIGURE 16-10 Paying Car Salespeople by Salary or by Commission Discuss the role personnel economics can play in helping firms deal with human resources issues. 16.5 LEARNING OBJECTIVE This figure compares the compensation a car salesperson receives if she is on a straight salary of $800 per week or if she receives a commission of $200 for each car she sells. With a straight salary, she receives $800 per week, no matter how many cars she sells. This outcome is shown by the horizontal line in the figure. If she receives a commission of $200 per car, her compensation will increase with every car she sells. This outcome is shown by the upward-sloping line. If she sells fewer than 4 cars per week, she would be better off with the $800 salary. If she sells more than 4 cars per week, she would be better off with the $200-per-car commission.

34. 34 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Raising Pay, Productivity, and Profits at Safelite AutoGlass A piece-rate system at Safelite AutoGlass led to increased worker wages and firm profits. Making the Connection Discuss the role personnel economics can play in helping firms deal with human resources issues. 16.5 LEARNING OBJECTIVE YOUR TURN: Test your understanding by doing related problem 5.7 at the end of this chapter. The experience of Safelite AutoGlass provides a clear example of workers reacting favorably to the opportunity to increase output in exchange for higher compensation.

35. 35 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Difficulty in measuring output. Concerns about quality. Worker dislike of risk. Other Considerations in Setting Compensation Systems Firms may choose a salary system for several good reasons: Personnel Economics Discuss the role personnel economics can play in helping firms deal with human resources issues. 16.5 LEARNING OBJECTIVE

36. 36 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production FIGURE 16-11 Equilibrium in the Market for Capital The Markets for Capital and Natural Resources The Market for Capital The rental price of capital is determined by equilibrium in the market for capital. In equilibrium, the rental price of capital is equal to the marginal revenue product of capital. Show how equilibrium prices are determined in the markets for capital and natural resources. 16.6 LEARNING OBJECTIVE

37. 37 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Economic rent (or pure rent) The price of a factor of production that is in fixed supply. The Market for Natural Resources The Markets for Capital and Natural Resources Show how equilibrium prices are determined in the markets for capital and natural resources. 16.6 LEARNING OBJECTIVE

38. 38 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production FIGURE 16-12 Equilibrium in the Market for Natural Resources The Market for Natural Resources The Markets for Capital and Natural Resources In panel (a), the supply curve of a natural resource is upward sloping. The price of the natural resource is determined by the interaction of demand and supply. In panel (b), the supply curve of the natural resource is a vertical line, indicating that the quantity supplied does not respond to changes in price. In this case, the price of the natural resource is determined only by demand. The price of a factor of production with a vertical supply curve is called an economic rent, or a pure rent. Show how equilibrium prices are determined in the markets for capital and natural resources. 16.6 LEARNING OBJECTIVE

39. 39 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Monopsony The sole buyer of a factor of production. Monopsony The Markets for Capital and Natural Resources Show how equilibrium prices are determined in the markets for capital and natural resources. 16.6 LEARNING OBJECTIVE

40. 40 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Marginal productivity theory of income distribution The theory that the distribution of income is determined by the marginal productivity of the factors of production that individuals own. The Marginal Productivity Theory of Income Distribution The Markets for Capital and Natural Resources Show how equilibrium prices are determined in the markets for capital and natural resources. 16.6 LEARNING OBJECTIVE

41. 41 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Basketball Coaches’ Salaries: A March to Madness? >> AN INSIDE LOOK The market for NCAA Division 1-A college basketball coaches.

42. 42 of 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. Chapter 16: The Markets for Labor and Other Factors of Production Compensating differentials Derived demand Economic discrimination Economic rent (or pure rent) Factors of production Human capital Labor union Marginal product of labor Marginal productivity theory of income distribution Marginal revenue product of labor (MRP) Monopsony Personnel economics KEY TERMS