ECN 203 1nd Edition Lecture 13Outline of Last Lecture II. The Market’s Response to Profits III. Profit, market signaling, and the invisible hand IV. Efficiency and the Invisible Hand Outline of Current Lecture V. Examining the Factors of Production a. Factors of Production b. Natural Resourcesc. Labord. Capital i. Physical and human capital VI. Allocations, techniques, and technology VII. Capital-Intensive vs. Labor-Intensive VIII. Factor Market Supply a. Shift Variables IX. Factor Market Demanda. Shift Variables b. Elasticity of Input Substitution Current Lecture2/16/157.1-7.3.8- Examining the Factors of Production o Factors of production are allocated and then combined in processes of production that apply techniques chosen from available technology in order to produce goods and services or capital  Factors of Production – basic inputs we use to produce. They include natural resources, labor, and capital.  Natural Resources - are things that come to us from in, on, or around the earth. Gifts of nature. We should use them wisely because they are finite. These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. Labor – also a gift of nature, the natural power humans have to exert themselves. It is a raw concept of human productive capacity.  Capital – a produced means of production, does not exist in nature. We must produce capital if we want to use it for production. Not a gift of nature. Invest resources in capital to increase productivity. - Physical Capital – “tools” for human hands to increase productivity. Ex: shovel, computer- Human Capital – the productive capacities we develop in ourselves. Ex: education, a degree, o We allocate factors to produce goods and services, or more capital. o Production applies a particular technique chosen from the available technology Techniques can be:- Labor intensive or capital intensive - Allocations, techniques, and Technologyo When factors are allocated that means we decide how we are going to use them  Like when we allocate timeo Once factors are allocated they are combined in a process of production  Meaning, using the factors together to actually make a good or service or capitalo The techniques are all the possible ways to produce something. - Capital-Intensive vs. Labor-Intensiveo Labor-Intensive  Labor as they key input- Ex. Digging with a shovel is labor intensive, digging by hand is extremely labor intensive o Capital-Intensive Capital as they key input - Ex. Using a machine - Factor Market Supplyo The Factor Supple (S) slopes up due to opportunity cost Meaning, the quantity of a factor supplied and the price of that factor are positively related.  Every resource has alt. uses. To use a resource in a particular market means forgoing the opportunity to use it in some other way. - The best forgone opportunity is the opportunity cost. o Shift Variables  Factor Market Supply functional form is:- QfS = S (pf | W, Pref., Alt.)o QFS is the quantity of the factor suppliedo S is the positive functional relationship o PF is the price of the factor o W = wealth, Pref. = preferences, Alt.= alternative opportunities - Wealth o As wealth increases, individuals might not feel the need to work as much – shifting S lefto A decline in wealth may have the opposite effect – shifting S right. - Preferences o A preference change might change an individual’s attitude toward supplying in the factor market in general  Ex. More men finding satisfaction as stay at home dads, shifting left o Or supply in a specific factor market More men as nurses, shifting right - Alternative opportunities o As opportunities opened up for women to become lawyers there was shift to the right in SLo And very possible a shift to the left in Sn as women chose law over nursing o This intermarket movement is another example of the market system as web of connections- Factor Market Demand o Functional form is QfD = D (pf | pp, Tech., pof )o Shift variables  Pp for price of product – reflecting conditions in the product market Tech. for technology Pof for price of other factors. o Factor market demand (D) slopes down due to diminishing marginal productivity (MP) The more of a factor employed the less productive it is due to diminishing MP, sothe less the demander is willing to pay for each successive unity. o Pp – conditions in the product marker Firms demand a factor to make a product, so demand for the factor is derived from conditions in the product market  Falling product price signals weak conditions in the product marker… factor demand shifts let  Rising product price signals strong conditions in the product market… factor demand shifts right. o This connection between factor market and product market through the derived demand is another example of the web of connections among markets o Technology and price of other factors  To the degree technology offers a firm alt. ways of producing, it can switch techniques as one factor becomes relatively more expensive. o Price of labor rises – suppose PL rises relative to Pk (price of capital). To the degree the firm can switch techniques.  The firm would adjust toward a more capital intensive or labor intensive technique? The degree to which the firm can switch techniques is called the Elasticity of Input Substitution. The easier it is to switch away from a technique that uses a factor which is getting relatively expensive, the more