Chapter 18: The Markets for the Factors of Production

This chapter talks about factors of production. It talks about capital which is the the economy’s stock of equipment and structures. Examples of this are profit, rent, and interest. The amount of money paid to landowners, workers, etc., depend on the supply and demand of those professions. The factors of production are the inputs used to produce the goods and services. Labor, land, and capital are the three most important factors of production. The demand for a factor of production is a derived demand. Derived demand is the demand for demand for a factor of production is derived from its decision to supply a good in another market. For example, the demand for gas station attendants is inseparably linked to the supply of gasoline. First, one has to analyze factor demand by considering how a competitive,profit maximizing firm decides how much of any factor to buy. The chapter talks about the production function which is the relationship between the quantity of inputs used to make a good and the quantity of output of that good.It also talks about marginal product of labor which is the increase in the amount of output from an additional unit of labor. Diminishing marginal product is the property whereby the marginal product of an input declines as the quantity of input increases. The value of the marginal product is the marginal product of an input times the price of the output. A competitive, profit maximizing firm hires workers up to the point where the value of the marginal product of labor equals the wage. Another important concept is that any event that changes the spply or demand for labor must change the equilibrium wage and the value of the marginal product by the same amount because these must always be equal. The purchase price of land or capital is the price a person pays to own that factor of production indefinitely. Rental price is the price a person pays to use that factor