Derived Demand
What is a factor market?
A market where resources such as labor, land, and capital are bought and sold
Marginal Product is the additional output produced by hiring one more unit of labor
In a perfectly competitive labor market, what determines the wage?
Supply and demand for labor
What is a monopsony?
A labor market with just a single major employer
Define capital
Man-made resources used to produce goods/services
What is derived Demand?
Demand for a factor depends on the demand for the good it produces
Why does marginal product eventually decrease?
Because of diminishing marginal returns
What happens if wage > equilibrium?
There is a surplus of labor which = unemployment
Define a union
An organization of workers to increase wages and working conditions
What is the payment to capital called?
Interest
What determines derived Demand?
Price of the product, productivity of the factor, price of substitutes
What is MRP?
Marginal Revenue Product = Marginal Physical Product x Price of Output
The additional revenue a firm earns from employing one more unit of input
What happens if wage < equilibrium?
There is a shortage of labor
How does a monopsony wage compare to a competitive wage?
It is lower.
What is the payment to land called?
Rent
What shifts factor demand?
Changes in product demand, productivity, price of other inputs
If MP = 4 units and Price = $10, what is MRP?
4 unit x $10 = $40
What shifts labor supply?
Preferences, population, alternative opportunities
Why is MRC above the wage in a monopsony?
Because hiring another worker increases the wage for all workers
Why is the supply of land perfectly inelastic?
Because there is a fixed amount of total land
How does product demand affect labor?
Higher product demand = higher labor demand
What is the profit maximizing rule of a factor market?
Hire until MRP = MRC
Why do wage different across different types of jobs?
Differences in skills, human capital, risk, or job desirability
What effect does a binding minimum wage have in a monopsony?
it can increase both wage and employment
Why does the demand curve for capital slope downwards?
Because the marginal product of capital decreases as more capital is added