ECON-1006EL Chapter Notes - Chapter 13: Marginal Revenue Productivity Theory Of Wages, Lorenz Curve, Marginal Revenue

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Chapter 13: How Factor Markets Work
Definitions
Functional Distribution of
Income
The distribution of national income among the major factors of
production: labour, capital, and land
Size Distribution of Income
The distribution of income among individuals, without regard to source
Lorenz Curve
A graph showing the extent of inequality of income distribution
Derived Demand
The demand for a factor of production that results from the demand for
the products that it is used to make
Marginal Revenue Product
(MRP)
The extra revenue that results from one unit more of a variable factor
Factor Mobility
The ease with which a factor of production can move between firms,
industries, occupations, or regions.
Compensating Differential
A difference in the payment to a factor of production (usually labour)
across two jobs to compensate the factor for differences in non-monetary
aspects of the two jobs
Transfer Earnings
The minimum payment required by a factor in order to prevent it from
leaving to other uses
Economic Rent
The excess of total earnings over the minimum necessary to prevent a
factor from moving to another use.
Equations
     
  
Key Points
When market forces interact to determine the prices and quantities of various goods, they
also determine the incomes of the factors that are used in producing the goods.
Profit-maximizing firms will hire units of a variable factor up to the point at which the
marginal revenue generated by the factor equals the marginal cost of employing the
factor.
To maximize its profits, any firm must hire each factor of production to the point when
the factor’s marginal revenue product just equals the factor’s price.
A competitive firm’s demand curve for a factor is given by that factor’s MRP curve.
The market demand curve for any factor of production is less elastic than what would
result from a simple horizontal summation of all the firms’ demand curves for that factor.
Any increase in a factor’s marginal product will lead to an increase in demand for that
factor. Such an increase can come about through improvements in the quality of the
factor or an increase in the number of other factors of production.
Anything that leads to an increase in demand for a product will lead to an increase in
demand for the factors used to produce that product.
The economy’s total supplies of land, labour, and capital each respond to economic
forces, but tend to change only gradually.
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