The Factor Market Factors of Production Natural Resources land Labor Capital Production Capital The Factor Market Natural Resources land The gifts of nature that are at our disposal land water air ID: 1027678
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1. The Factor MarketChapter 7
2. The Factor MarketFactors of ProductionNatural Resources (land)LaborCapital (Production Capital)
3. The Factor MarketNatural Resources (land) The gifts of nature that are at our disposal (land, water, air …)We should use of them wisely as they are not infinite
4. The Factor MarketLabor A gift of nature the human capacity to exert oneself to be productivewithout labor there is no production
5. The Factor MarketCapital (Production Capital versus Financial Capital)Not a gift of naturea produced means of productionhumans make capitalwe invest in producing capital to increase productivity
6. The Factor MarketCapitalTwo production capital embodiments we invest in:Physical – “tools” for human hands to increase productivity (shovel, computer)Human- the productive capacities we develop in ourselves (brain power)
7. The Factor MarketWe allocate factors to produce various goods and services, or more capital.The production of each of these outputs applies a particular technique chosen from the available technology (i.e., all available techniques)Techniques can be:Labor intensiveCapital intensive
8. The Factor MarketLabor intensive implies an emphasis on labor as the key input of productionDigging a ditch with a shovel or by hand (even more labor intensive)Capital intensive implies an emphasis on capital as the key inputDigging a ditch with machinery
9. Factor Market Supply
10. Factor Market SupplyFactor Market Supply functional form isQfS = S (pf | W, Pref., Alt.)Where the shift variables are W for wealth Pref. for preferences Alt. for alternative opportunities
11. Factor Market SupplyFactor Supply (S) slopes up due to opportunity costThe more of my factor you employ (e.g., my time) the less I have for myself so I want to be compensated My MU from “my time” I still have increases as I have less and less for me …thus the opportunity cost of “my time” increases as you want to employ more of it… so you have to pay me more for successive units of this factor, (my time), to be supplied
12. Factor Market SupplyFactor Market Supply shift variablesWealthAs wealth increases, individuals might not feel the need to work as much…shifting S left.A decline in wealth may have the opposite effect shifting S right.
13. Factor Market SupplyFactor Market Supply shift variablesPreferencesAs preferences change, an individual’s attitude toward supplying in the factor market in general, will changeParticipate in certain professions?Participate at all?
14. Factor Market SupplyFactor Market Supply shift variablesAlternative opportunitiesAs opportunities opened up for women (let’s say practicing lawyers) there was a shift to the right in SL…and very possibly a shift to the left in SN as more women chose law school over nursing schoolThis intermarket movement is another example of the market system as web of connections
15. Factor Market Demand
16. Factor Market DemandFactor Market Demand functional form isQfD = (pf | pp, Tech., pof )Where the shift variables are:pp for price of product representing conditions in the product marketTech. for technologypof for price of other factors
17. Factor Market DemandFactor Market Demand (D) slopes down due to diminishing marginal productivityThe more of my factor you employ (e.g., my time) the less productive that input is for you due to diminishing MP…so the less you’re willing to pay for each successive unit.
18. Factor Market DemandFactor Market Demand shift variablesFirms demand a factor in order to make a product, so demand in the factor market is derived from conditions in the product market.Weak conditions in the product market signaled by falling product price reduces demand for the factor (factor demand shifts left).Strong conditions in the product market (rising price) increases demand for the factor (factor demand shifts right).
19. Factor Market DemandFactor Market Demand shift variablesTechnology and price of other factorsTo the degree that technology offers a firm alternative ways of producing…it can switch techniques as one factor becomes relatively more expensive compared to another
20. Factor Market DemandFactor Market Demand shift variablesTechnology and Price of Other Factors Suppose pL (price of labor) rises relative to pc (price of capital), to the degree the firm can switch techniques, how would the firm adjust…Toward a more capital intensive or labor intensive technique?
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22. Factor Market DemandThe degree to which the firm can switch techniques is called the Elasticity of Input Substitutionthe more techniques available, the more “elastic” because the easier it is to switch away from a technique that uses a factor that’s getting relatively expensive
23. Factor Market DemandElasticity of Input Substitution - a caseSuppose you want a raise …before you ask for one, you had better consider the elasticity of input substitution for the factor you contribute to the firm’s production.Why?
24. Factor Market DemandSame Case – recalling that factor demand is a derived demandSuppose you want a raise …before you ask for one, you had better consider the product market own price elasticity of demand for the product your factor makes.Why?