Economics Exam 3 Chapters 16 17 18 19 20 21 Chapter 16 The Factors of Production Factors of Production the ingredients that go into making a good or service Land labor capital Capital manufactured goods that are used to produce new goods Demand for factors of production is referred to as derived demand Marginal Product the increase in output that is generated by an additional unit of input Inputs usually have diminishing marginal productivity adding more workers will generally contribute less to a firm s output than the first worker The marginal product of labor is the slope of the total production curve when output is plotted against the quantity of the input that is used Individuals who work are the suppliers of labor Firms that produce goods using those workers are the buyers of labor The wage that workers earn is the price of labor Demand for Labor A firm wants to produce a product up to the point where the marginal revenue from the last unit is equal to the marginal cost of producing that unit Value of the marginal product the marginal product generated by an additional unit of input times the price of the output Marginal Product of labor Change in of units produced Change in of workers Value of Marginal Product Price x Marginal Product of Labor Marginal Profit Value of marginal product Wages Supply of Labor The decision to supply another hour of labor depends on the trade off between the benefits of an hour of work the wages plus any other perks and the opportunity cost lost time for leisure or other kinds of work The Price Effect describes the increase in labor supply in response to the higher wage that can be earned for each hour of work The Income Effect describes the decrease in labor supply due to the greater demand for leisure caused by a higher income In a competitive labor market the price of labor wage is determined by the intersection of the supply and demand curves for labor Determinants Determinants of Labor Demand Supply of other factors o Ex Supply of gasoline falls pushing prices of gasoline up and reducing the use of gas guzzling farm machinery this could increase the marginal product of farm workers o Often labor augmenting meaning that they increase the marginal product of labor o Or can be labor saving meaning that they reduce the marginal product of labor Technology Output Prices o Ex A recession decreases the demand for fresh tomatoes lowering the price so the value of the marginal product decreases and the labor demand curve shifts left If price increases the value of the MPL increases and the labor demand curve shifts right Determinants of Labor Supply Culture Population be higher Other Opportunities o Women in the workforce longer hours in the U S o When there are more potential workers all else equal the total labor supply will o A change in the next best opportunity available to workers can increase of decrease the labor supply in a particular industry Human Capital the set of skills knowledge experience and talent that determine the productivity of workers Land and Capital When a firm wants to use land or capital it has two choices to rent or to buy Rental Price the price paid to use a factor of production for a certain period or task Purchase Price the price paid to gain permanent ownership of a factor of production Economic Rent the gains that workers and owners of capital receive from supplying their labor or machinery in factor markets Graphically the area above the supply curve and below equilibrium rental price is the economic rent Factor distribution of Income shows how much income people get from labor compared to land and capital Real World Labor Markets Efficiency Wage a wage that is deliberately set above the market rate to increase worker productivity Monopsony a market in which there is only one buyer but many sellers Can push wages lower than the competitive level Chapter 17 International Trade Comparative Advantage the ability to produce a good or service at a lower opportunity cost than others can Absolute Advantage the ability to produce more of a good than others with a given amount of resources The increase in welfare in both countries that result from specialization and trade is called gains from trade Causes of Comparative Advantage Natural Resources and Climate Factor Endowment Technology o Land intensive or capital intensive activities in certain countries Autarky an economy that is self contained and does not engage in trade with outsiders Imports goods and services that are produced in other countries and consume domestically Exports goods and services that are produced domestically and consumed in other countries Net Importer When the world price is lower than the domestic price Net Exporter when the world price is higher than the domestic price Big Economies Restrictions on Trade Protectionism a preference for policies that limit trade Trade Liberalism policies and actions that reduce trade restrictions Tariffs a tax on imported goods Quotas a limit on the amount of a particular good that can be imported As a general rule free trade increases demand for factors of production that are domestically abundant and it increases the supply of factors that are domestically scarce In other words it acts to equalize the supply of and demand for factors of production across countries which in turn causes factor prices such as wages to converge across countries The result is that the owners of domestically scarce factors of production lose due to increased competition and the owners of domestically abundant factors gain from increased demand World Trade Organization WTO an international organization designed to monitor and enforce trade agreements while also promoting free trade Import Standards Blanket standards imposed on all imports Import standards on specific countries Embargo a restriction or prohibition of trade in order to put political pressure on a country Chapter 18 Externalities Externality a cost or benefit imposed without compensation on someone other than the person who caused it Network Externality the effect that an additional user of a good or participant in an activity has on the values of that good or activity for others Private Cost a cost that falls directly on an economic decision maker External Cost a cost imposed without compensation on someone other than the person who caused it Social Cost the entire cost of a decision including both private costs and any external costs Private Benefit a benefit that
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