Unit 6 Review Sheet Sydney, Sam Alex

Module 69
•The factors of Production:
•Labour: work done by humans
•Land: resources provided by nature
•Capital: physical capital(manufactured resources)
:and human capital(improved labour based on education)
Entrepreneurship: risk-taking activities that bring together resources for innovative production
Derived demand: demand for the factor (labour, land, capital, entrepreneurship) is decided
based on the demand for the firm’s output

Value of Marginal Product

MP is the same as MPP
MRP is the same as VMPL
This is the formula for the value of the marginal product of labour VMPL=P x MPL
To maximize profit the firm will employ workers until the point where VMPL=W

Shifts of the factor demand curve

Three main reasons why the factor demand curve shift
•Changes in price of the goods
•Changes in the supply of other factors
•Changes in technology

Terms for Module 69

● Physical capital: manufactured productive resources, like equipment
● Human Capital: improvement in labour because of education
● Derived demand: it results from the demand for the output being produced
● Factor distribution of income: division of total income among all the factors
● Value of marginal product: this is the value of the additional output generated by
employing one more unit of that factor
● Value of the marginal product curve: the curve that shows how the value of the marginal
product of that factor depends on the quantity of the factor employed.
Unit 6 Review Sheet Sydney, Sam Alex

Module 70
Demand in the Markets for Land and Capital
● To maximize profit a farmer will rent more land up until the value of the marginal
product of an acre of land is equal to the rental rate per acre
● If the capital or land is already owned then there is an implicit cost. Whether the item or
land could have been rented out for example

Supply in the market for land and capital

• Supply curve for land is steep meaning its inelastic-land is typically difficult to get and
expensive. There is not an unlimited supply of land
• Supply for capital is almost perfectly horizontal so it's very elastic. That’s because the supply
of capital is responsive to price and because you can always produce more capital

Marginal Productivity Theory

So based on diminishing returns the last unit employed generates a lower output
therefore will be paid less because the value of there output generated is lower. This
means that everyone is paid the lower amount so the company can make profit
Module 70 terms:
● Rental rate: is either the cost of land or capital and can be explicit or implicit
● Marginal productivity theory of income distribution: is the theory that every factor of
production is paid the equilibrium value of its marginal product

Module 71: The market for labour

Terms:

- Time allocation: How many hours to spend on different activities

- Leisure: is time available for purposes other than earning money to buy marketed
goods.
- The Individual labour supply curve: shows how the quantity of labour supplied by an
individual depends on that individual’s wage rate.
- The marginal revenue product of Labour (MRPL): is equal to the marginal product of
labour times the marginal revenue received from selling the additional output. The
marginal revenue of land and the marginal revenue product of capital are equivalent
concepts.
- The marginal factor cost of labour (MFCL) : Is the additional cost of hiring an
additional worker. The marginal factor cost of land and the marginal factor cost of capital
are equivalent concepts.
- Monopsonist: is a single buyer in a factor market.
- Monopsony: A market in which there is a Monopsonist.
Unit 6 Review Sheet Sydney, Sam Alex

Work versus Leisure:

- Based on the time allotted during the day to supply labour is to give up leisure.
- The profession one chooses or employment situation works in direct correlation
with the amount of hours one has to work in a day or in a week.
- This is where time allocation come into play:
- The amount of time spent on a particular task.
- The more one works the more one can afford however, this come at a cost, which
is a cut in leisure:
- The time spent not working i.e.: hobbies, exercising, family time etc.
Wages and Labour Supply
- Wages and supply labour work hand in hand the lower the wage the more labour is
supplied, as well the higher the wage the less labour is supplied.
- This is the individual labour supply curve: the relationship between the wage rate and
the number of hours of labour supplied by an individual worker.
- Substitution Effect: lowers the amount of leisure time and increases the amount of time
spent working
- Income Effect: workers will reduce the amount of hours they work because they can
maintain a target level of income through fewer hours

Figures.
Unit 6 Review Sheet Sydney, Sam Alex

Shifts of the Labour Supply Curve

There are many things that can affect labour supply which is the increase or decrease of a
workers willingness to work at any given wage.
Some of which are:
- Changes in Preference and Social Norms.
- Change in population
- Changes in opportunities
- Changes in Wealth

Equilibrium in the Labour Market

- The Market Labour Demand Curve is the horizontal sum of all the individual firms that
hire labor
- The equilibrium wage rate is when the the quantity of labour supplied is equal to the
quantity of labour demanded

When the Product Market is Not Perfectly Competitive

When the Labour Market is Not Perfectly Competitive

- The difference between an imperfectly competitive labour market and a perfectly
competitive labour market is the marginal factor cost.
- The Marginal Factor Cost of Labour (MFCL) is the additional cost of hiring one more unit
of labour.
- Perfect Competition: each firm is so small that it can hire as much labor as it wants at
the market wage
- Imperfect Competition: is upward sloping and the marginal factor cost is above the
market wage
Unit 6 Review Sheet Sydney, Sam Alex

- When there is only a single buyer of a factor it is called monopsonist.

- A labor market in which there is only one firm hiring labor it is referred to as a
monopsony.
- The marginal factor cost of labor curve is above the market labor supply curve because ,
to hire more workers in an imperfectly competitive labor market such as a monopsony,
the firm must raise the wage and pay everyone more. This makes the additional cost of
of hiring another worker higher than the wage rate
-

- The Equilibrium wage is found on the vertical axis where Lm hits the market supply
curve at Wm.
Unit 6 Review Sheet Sydney, Sam Alex

Module 72: The Cost Minimizing Input Combination

Terms:
cost minimization rule: when firms adjust their hiring of inputs until marginal products per
dollar for each input are equal to one another.

Optimal Input Mix:

- Firms use this optimal input combination to find the perfect cost minimizing input
combination
- If you are looking at various different combinations of both labour and capital to serve the
same amount of consumers you are really measuring efficiency per dollar. Meaning how
you can serve the same amount of people and comparing the prices to see which one is
lower and more efficient.
Cost Minimization Rule:
- They use the cost minimization rule: when firms adjust their hiring of inputs until
marginal products per dollar for each input are equal to one another.
- If the inputs are labour and capital, marginal product of labour per dollar (MPL), marginal
product of capital per dollar (MPK)
- MPL/ wage = MPK/ rental rate
- When the MPL > MPK, the firm must get the marginal product per dollar of each input to
equal one another
- Ex. if the MPL is 40 units and the wage for labour is $20 and the MPK is 60 units and the
rental rate is $60.
MPL/ wage = MPK/ rental rate ----------> 40/20= 2 , 60/60= 1
- The firm will buy more labour and less capital since they receive more product from
labour
- The marginal product of labour to fall and the marginal product of capital to rise since it is
imbalanced because of diminishing returns
- The firm will continue to buy more labour until the falling MPL meets the rising MPK
- The same thing will happen when the MPL < MPK

Module 73: Theories of Income Distribution

Terms:
Unit 6 Review Sheet Sydney, Sam Alex

Compensating differentials: wages differences among jobs that show that some jobs are less
enjoyable or more dangerous than others.
Equilibrium value of the marginal product: the additional value produced by the last worker
employed
Unions: contribute to the differences in wages by being organizations of workers that raise
wages for all involved and improve the conditions they work in
Human capital: human capital refers to how well experienced or prepared they are for a job.
Reasons for wage inequality:
- Compensating differentials: wages differences among jobs that show that
some jobs are less enjoyable or more dangerous than others. (if you deal with
hazardous equipment you are paid more than someone with less dangerous
equipment)
- People who deal with a higher risk or unpleasant job are paid due to the
equilibrium value of the marginal product.
- Differences in talent:They will be paid more than a person with less talent or less
ability since they produce a better product that will have a higher price.
- Differences in the quantity of human capital: human capital refers to how well
experienced or prepared they are for a job. A person with a higher human capital
receives a higher value of marginal product.

- This graph shows that there are much more cleaners than there are neurosurgeons
because being a neurosurgeon requires having a much more extensive skill set and
therefore they are paid much more.

- Market Power:
- Due to the market productivity theory of income distribution we assume that all
factor markets are perfectly competitive, however let's look at factor markets not
involved in perfectly competitive markets
- Unions contribute to the differences in wages by being organizations of workers
that raise wages for all involved and improve the conditions they work in
- Instead of “one-on-one wages” unions use “collective bargaining” where those
who represent the unions help to raise employers wages within the union
Unit 6 Review Sheet Sydney, Sam Alex

- Wage inequality can also come from efficiency wages:

- Efficiency wages are used as an incentive to get workers to work harder to earn a
higher wage.
- The efficiency wage model is when employers pay above the employees regular
wage when they are more efficient in order to improve performance
- Discrimination:
- Wage inequality has occurred when employees are paid based on their gender,
race, religion, etc.
- Ex. If a firm decides they will pay men 20% more than women for the same job
and both men and women have the same qualifications, the firm will hire the
woman since they will spend less money paying the woman if they hire her. As a
result there will be a higher demand for firms to hire woman since they will
reduce the firm’s cost.

Activity Questions and Answers:

1. In the labour market what causes a movement along the labour supply curve?
a) a change in the wage rate
b) how desirable the job is perceived
c) training in the field
d) changes in the production process

The answer is a

2. Marginal factor cost of labour (MFCL) is:

a) the single buyer in a factor market
b) The additional cost of hiring one more unit of labour
c) Is equal to the marginal product of labour x the marginal revenue received Fram selling additional output
d) The relationship between the wage rate and the number of hours of labour

The answer is b

3. Which factor of production deals with the risk taking aspects?

a) Labour
b) Land
c) Entrepreneurship
d) Capital

Answer: c

4. Word that describes : demand for the factor is decided based on the demand for the firm’s output?

a) VMPL
b) Marginal productivity theory of income distribution
c) Derived demand
Unit 6 Review Sheet Sydney, Sam Alex

d) Compensating differentials

Answer: c

5. Why will the supply of capital in the market of land and capital always be more elastic than land?

a) You can always produce more capital

b) Land is less needed
c) Capital is more expensive
d) This question is wrong land is more elastic

Answer: a

6. True or false: when the supply of land or capital decrease, the marginal product and rental rate increase

a) True
b) false

Answer: true

7. Unions raise wages for only one individual

a) True
b) False

Answer: false

8. Optimal input mix helps to find the perfect cost minimizing input combination

a) True
b) False

Answer: true

9. What is the efficiency wage model?

a) a raise in wage based on your performance

b) a raise in wage based on your revenue
c) a raise in wage based on your personality
d) a raise in wage based on your knowledge of TV

Answer: a

10. What is the cost minimization rule?

a) MPL x MPK
b) MPL/wage = MPK/ rental rate
Unit 6 Review Sheet Sydney, Sam Alex

c) MPK - MPL
d) MPK/MPL

Answer: b

11. If a clothing store has a budget of $17 and each worker costs $3 and each unit of clothing costs $4, what is the
optimal combination of inputs?

# of workers/capital MPL MPK

1 3 8

2 6 12

3 9 16

Answer: 3 workers and 2 units of clothes