Contrast the roles of individuals and firms in the factor market and in the product market Give an example of each of these kinds of markets Describe the relationship between factor markets and individuals incomes Define natural resources and labor Give an example of each Define capital Distinguish between physical and human capital Give an example of each Distinguish between production and financial capital Define process of production Explain the concept allocation of a factor Define technique and technology Describe the relationship between these concepts Factor Market individuals come with their share of the social endowment in the form of factors of production they own and can supply like labor production capital and natural resources Firms demand these factors ex a factory is looking for workers so individuals get jobs and give their endowment Product Market individuals demand the products and firms supply the products ex individuals are looking for shoes so firms produce and therefore supply them The prices firms pay for the factors that the individuals have in the factor market determine the income of those who bring their factor to the market distribution of income is determined in the factor market Natural resources gifts of nature that come from in around or on the Earth they are finite Example wind water plants Labor the natural power humans have to exert themselves raw human capacity for productive exertion Example ability to wash a car or lift bags of soil and move them Capital produced mean of production not a gift of nature we must produce it Physical capital embodied in a tool that makes us more productive like a spear or hammer Human capital embodied in ourselves and makes us more productive like education Production capital a produced mean of production helps in means of production Financial capital money Using the factors together to actually make a good or service or capital this occurs after factors are allocated Deciding how to use a factor to decide where to produce Technique all the possible ways to produce something Technology the set of available techniques Technology is like the book of blueprints for production processes and techniques are the pages of that book Labor intensive techniques that use relatively more labor than capital Capital intensive techniques that use relatively more capital than labor Ex digger a hole is more labor intensive while using a backhoe to dig is more capital intensive The choice between the two is based on the relative costs of labor and capital For ex in Haiti labor is cheaper than capital intensive techniques while the vice versa is true in the US Factors of production are allocated in the process of production The process of production utilizes techniques through technology to make goods and services An excess supplied means the quantity supplied is greater than the quantity demanded so more people are looking for jobs in that market than there are jobs available As a result there would be some unemployed workers The wages would fall as a result of employers bidding for workers The bidding and falling price would continue until the excess supply was eliminated and the market reaches equilibrium Compare labor intensive and capital intensive techniques Explain how a choice is made among techniques when technology offers an array of more labor or more capital intensive techniques Specify the arrangement of these terms as they are used in our model factors allocated process of production techniques technology goods and services Describe what an excess supply in a labor market would look like in real human terms Using an appropriate graph explain how given our nice assumptions a labor market will adjust from an initial excess supply condition slides pg 107 notes Using an appropriate graph explain how given our nice assumptions a labor market will adjust from an initial excess demand condition slides pg 107 notes Explain why the supply curve for a factor would slope upward Write the factor supply relationship in functional form Identify the shift variables in the factor supply relationship Identify the sources of market labor supply shifts Explain the following statement if nurses pay did not include an interest as well as a wage component there would eventually be no nurses Explain the concept sunk costs Describe the role of sunk costs in decision making Give an example Identify the level of return all participants in the factor markets can expect under our nice assumptions The quantity of a factor supplied and the price of that factor are positively related this is due to the relationship between quantity of a factor supplied and opportunity cost every resource has alternative uses so using a resource in a particular market means losing the opportunity to use it in another market the more use of factors there are the more one must be compensated Qf S S pf W Pref Alt Qf S quantity of the factor supplied W Wealth Pref Preferences Alt Alternative opportunities Wealth the more wealth there is people don t need to work as much so supply shifts left Preferences preference change may change one s attitude toward supplying in the factor market Alternative opportunities ex more doctor jobs available for women so supply of doctors shifts right and nurses would shift left If there was not a significant return to the educational investment necessary to become a nurse no one would make that investment in his or her human capital Costs already paid for choices made Sunk costs of past choices are best left in the past If the path down which those investments led is no longer the most satisfying it makes no sense to follow that path simply because you can resources into it Current choices are about the future and they are most constructive if the decision is based on lessons of the past and on future costs and future benefits Comparable occupations have comparable wages making changing jobs useless They are comparable occupations because they have similar requirements in terms of human capital investment etc normal return because no one has an advantage Describe how labor mobility creates a web of connections among the factor markets Identify the reason firms buy factors Explain the concept derived demand Give an example Describe the value of the marginal product VMP what it is and how it is calculated Explain why the demand for a factor slopes down Write the factor demand relationship in functional form Identify the shift variables in