Factor_markets by toitim

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									Factor markets

Factor markets
General information.  Specification:
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Labour  Capital  Land  Entrepreneurship.
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Factor Markets
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Four factors of production:
   

Labour Capital Land Entrepreneurship.

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In factor markets we reverse the buyer and seller pattern seen in the goods markets (in goods markets firms sell and households buy and in factor markets firms buy and households sell).

Factor markets
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Households own or control the four factors and sell them to producers. Factor markets as interaction between buyers and sellers of inputs. Driven by supply and demand as other markets. Demand for a factor - derived demand – determined by or derived from consumer demand for the final good.

The benefit of a factor production
What a unit of input will do its total revenue.  MRP – Marginal Revenue Product  MRP = ΔTR/ΔQinput
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The change in total revenue relative to the change in input use.

MRP can be thought of as the financial benefit of acquiring the next unit of an input.

Value of the marginal product (MP)
If the firm faces a perfectly competitive market for its output, then it is no longer true that it must decrease price in order to sell additional output.  Value of MP – value of additional units produced by an input sold at constant going market price.  MP * output price
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The cost of a factor of production
What a unit input will do to its total cost.  MRC – Marginal Resource Cost  MRC = ΔTC/ΔQinput:
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The change in total cost relative to the change in input use.

It can be thought of as the financial burden of acquiring the next unit of an input.

The Labour Market
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Labour demand and labour supply. Equilibrium state. Unions and how they raise wages.

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Labour demand

Labour supply

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The demand for inputs is a derived demand reflecting demand for the firm’s output.

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It is determined by the amount of people who are able to work on a particular position.

Equilibrium State

How Unions raise wages

Capital-factor of production
Refers to: facilities, equipment, inventories to produce goods and service.  Financial capital-money to start or maintain the business.  Human capital- the skills of the workers & stock of abilities.
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Investments
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Desirable Employ a worker or purchase a machine? Depreciation- way of business spreading the cost over the lifetime of equipment or facilities. Ways: Write off once a year or write off greater amount at the beginning.

Money today worth more than tomorrow
Expected rate of return < expected rate of interest.  In economics, there is no difference between a payment and a lost opportunity to make money.  Present value - obtain future value at some time P(1+r)t = F.
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Likelihood of 10%
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Benefit of equipment in 2 year 2$ - in 3 year 3$? Cost of 9% = 7,75% or even 10,25% Cost in low end, benefit on a high end = profit gained.

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Conditional factors of a loan
Pure interest rate – risk free, one credit market, all borrowers are equal.  Prospective borrower.  Purpose that pays no future benefit.  Shorter period of time – less risky.  Time – future rate of inflation.
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Inflation rate
Nominal (face value current dollars) vs. Real variables (purchasing value, constant dollars).  Imagine you put aside 1000$ at 9% with 4% inflation… Real int. rate = Nominal i. r. – inflation  Banks react to change of inflation, government to economy overheating.
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Land
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Acreage and natural resources. Economic rent – payment for land:
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Usually above any necessary payment to have a good or service provided. Payment someone receives for having legal property rights over the land provided by nature. It does not contain any costs connected with the extraction or processing of raw material.

„If the market for the factor of production is extremely competitive, the value of the land or usage rights will rise until all the economic rent goes to the original owner leaving the user with a normal rate of return – a zero economic profit.”

Land
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Tangible wealth of the economy. The supply of land in nature is perfectly inelastic. Economic rent serves only an allocative function.

The market for land services

Allocating land between competing uses

Entrepreneurship
 Ability

to recognise the economic opportunity and to organise the other three factors of production to exploit that opportunity.  The role of entrepreneur.

The functions of economic profit
Reward of innovation – extra profit for innovator, short state of uniqueness, making profit for a long run.  Reward for hard work – efforts of one or two people can change the profits of the company.
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The functions of economic profit
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Reward of risk taking – close link with larger profit, success or failure.
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Expected value:
• E(V)=probability of success * payoff/successful

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Signals for resources to move – inducing firms to shift production facilities and resources from less valued to uses to more valued ones. Reward for barriers to entry – not to the benefits of society.

Summary
Labour, capital and land might be distinguished according to the speed of their supply adjustment.  The importance and influence of each factor on the market structure.
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THANK YOU FOR YOUR ATTENTION


								
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