Unit 5: Factor Markets

• Factor market: where labor is bought and sold
• Product market: where goods are bought and sold
• The four factor payments:

  • rent
  • wage
  • interest
  • profit
• As wage increases, supply of labour increases
• 3 common shifters of demand for labor:

  • change in price of related resources
  • change in demand for product (substitutes and compliment resources)
  • change in productivity of resource
• 3 common shifters of supply for labor:

  • Quantity of qualified workers
  • Government regulations
  • Cultural expectations
• Marginal Resource Cost (MRC): the amount that an extra input adds to the firm's total cost
• Monopsony Characteristics:

  • Labor market with one buyer and many sellers
  • Employer has market power and pays price (wage) that is below the competitive price (wage)
• Least cost rule when combining resources: marginal product of labor / price of labor = marginal product of capital / price of capital