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AP Economics

AP Economics. Mr. Bernstein Module 69: Factor Markets: Introduction and Factor Demand January 2, 2014. AP Economics Mr. Bernstein. Factors of Production AKA “resources” or “inputs” Land Resources provided by nature Labor Work done by humans Capital

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AP Economics

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  1. AP Economics Mr. Bernstein Module 69: Factor Markets: Introduction and Factor Demand January 2, 2014

  2. AP EconomicsMr. 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

  3. AP EconomicsMr. 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% )

  4. AP EconomicsMr. Bernstein Marginal Productivity and Factor Demand • MP = Marginal Product of one additional unit • ie MPL is additional output from hiring one more worker • VMP = Value of Marginal Product • ie VMPL is additional value from hiring one more worker; = MPL 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 VMPL >= W • Law of Demand applies in factor markets

  5. AP EconomicsMr. 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

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