DEMAND AND SUPPLY FACTORS

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Created by
Greg

Cards (54)

  • Factors of production

    The input used in the production process to generate output
  • Lesson Objectives

    • Explain the rewards of the factors of production
    • Explain the concept of derived demand
    • Outline the marginal productivity theory
    • Apply the marginal productivity theory to the demand for land, capital and labour
  • Derived demand/Indirect demand

    The demand for factors of production is described as a derived demand because the demand for a factor arises indirectly out of the need to fill consumers' demand for final goods or services
  • Marginal productivity theory

    The demand for a factor of production input is based on the marginal product (additional output) of the factor and the price of the output produced by the factor
  • Assumptions of MPT/MRP theory
    • Perfect competition prevails in both product and factor market
    • The firm has at least one fixed factor of production and is considering how much of the variable factor to employ, hence firm operates in the short run and is subject to DMR
    • Law of diminishing marginal returns operates on the marginal productivity of labour
    • Labour is homogeneous
    • Full employment prevails
  • Limitations/Criticisms of MRP
  • Marginal physical product (MPP)

    The additional output produced by the employment of an additional unit of a variable factor of production
  • Marginal revenue product (MRP)

    The additional revenue generated by the employment of an additional unit of a variable factor of production
  • Calculating MPP, TR, MRP and plotting the MRP curve
    1. Calculate MPP
    2. Calculate TR
    3. Calculate MRP
    4. Plot the Marginal Revenue Product curve
  • The firm's demand for a factor of production is the MRP curve, as it shows how many units of the factor the firm is willing to employ at different price levels
  • The industry demand for a factor of production is determined by the horizontal summation of the individual MRP curves of all the firms in the industry
  • Perfectly competitive labour market

    The labour market is like any other good in the market, except demand comes from firms instead of consumers. The price firms pay for labour is known as wages.
  • Assumptions of perfectly competitive labour market

    • Perfect competition prevails in both product and labour markets
    • Firms are price takers in the labour market
    • Workers are homogeneous and equally productive
    • Full employment prevails
  • Imperfectly competitive labour market
    The monopsonist is the only employer in the industry and must raise the marginal wage to attract new workers if it wishes to employ more labour
  • In a monopsony, the monopsonist can pay workers less than their marginal revenue product, exploiting the workers
  • Supply of land

    The supply of land of a given quantity at a given location is truly fixed in supply. The supply curve for land is perfectly inelastic.
  • Supply of capital

    The supply of loanable funds comes from all those sources from which it can be borrowed, i.e. savings. The reward for this sacrifice is the rate of interest.
  • Factors affecting the supply of land
    • Land is fixed in supply
    • Natural limitations as constraints by topography, climate, access to water etc.
    • Extent of existing development
    • Zoning - Governments can control the development of communities through zoning restrictions
  • Factors affecting the supply of labour
    • Wage rates
    • Cost of living
    • Availability of alternative jobs
    • Trade union activity
    • Government policies
  • Backward bending supply curve of labour
    As wage rates increase, the supply of labour may decrease as workers choose to work fewer hours and enjoy more leisure time
  • Factors affecting the supply of capital
    • Interest rates
    • Savings rates
    • Government policies
    • Confidence in the economy
  • Factors determining wages/salaries

    • Demand and supply of labour
    • Productivity of labour
    • Cost of living
    • Trade union activity
    • Government policies
  • Factors determining rent

    • Demand and supply of land
    • Productivity of land
    • Location
    • Government policies
  • Factors determining interest

    • Demand and supply of capital
    • Risk
    • Inflation
    • Government policies
  • Transfer earnings

    The minimum amount of payment required to keep a factor of production employed in its current use
  • Economic rent

    Payments made to any factor of production in excess (over and above) of the minimum payments required by the factor
  • Quasi rent

    Economic rent that is only made possible due to the inelasticity of supply of a factor of production
  • Key terms in labour
    • Wage rate
    • Marginal revenue product
    • Marginal physical product
    • Average physical product
    • Transfer earnings
    • Economic rent
    • Quasi rent
  • Factors of production

    The input used in the production process to generate output
  • Lesson Objectives

    • Explain the rewards of the factors of production
    • Explain the concept of derived demand
    • Outline the marginal productivity theory
    • Apply the marginal productivity theory to the demand for land, capital and labour
  • Derived demand/Indirect demand

    The demand for factors of production is described as a derived demand because the demand for a factor arises indirectly out of the need to fill consumers' demand for final goods or services
  • Marginal productivity theory

    The demand for a factor of production input is based on the marginal product (additional output) of the factor and the price of the output produced by the factor
  • Assumptions of MPT/MRP theory
    • Perfect competition prevails in both product and factor market
    • The firm has at least one fixed factor of production and is considering how much of the variable factor to employ, hence firm operates in the short run and is subject to DMR
    • Law of diminishing marginal returns operates on the marginal productivity of labour
    • Labour is homogeneous
    • Full employment prevails
  • Limitations/Criticisms of MRP
  • Marginal physical product (MPP)

    The additional output produced by the employment of one more unit of a variable factor of production
  • Marginal revenue product (MRP)

    The additional revenue generated by the employment of one more unit of a variable factor of production
  • Calculating MPP, TR, MRP and plotting the MRP curve
    1. Calculate MPP
    2. Calculate TR
    3. Calculate MRP
    4. Plot the Marginal Revenue Product curve
  • The MRP curve constitutes the firm's demand curve for a factor of production, since it shows how many units of factor of production a firm is willing to employ at different price levels
  • The industry demand for a factor of production is determined/obtained from the horizontal summation of the individual marginal revenue product curves of all the firms in the industry
  • Perfectly competitive labour market

    The labour market is like any other good in the market, except demand comes from firms instead of consumers. The price firms pay for labour is known as wages.