Factor Markets and Income Distribution
Determinants of Factor Demand
Demand for Labor (inverse relation with wage rate)
Marginal Product of Labor
Marginal Revenue Product of Labor (MRP)
- Demand for goods and services – direct demand à for pleasures and satisfaction
- Productivity of the productive resources – derived demand
- Prices of the factor substitutes & complimentary resources – example: Japan-can use machine as substitute in labor
Demand for Labor (inverse relation with wage rate)
- It is primarily based on the law of demand
- At higher wage rates, the quantity demanded for labor falls
- Firms are more willing to employ more workers at lower wage rates
- The quantity demanded for labor has an inverse relationship with wage rates.
Marginal Product of Labor
- Is the additional output produce by the employment of an additional man hour of labor
Marginal Revenue Product of Labor (MRP)
- Additional revenue (income0 obtained by selling the marginal product of labor
Marginal Resource Cost (MRC)
Employment Decision
The rules of employing more man hours of labor are:
Supply in the Factor Market
Supply of Labor
- Is the payment of the additional man hour of labor and other productive resources like land and capital
Employment Decision
The rules of employing more man hours of labor are:
- MRP > MRC = employ more man hours of labor
- MRP < MRC = reduce man-hour of labor
- MRP = MRC = maintain man-hours of labor
Supply in the Factor Market
- The law of supply governs the behavior of resources in the factor market.
- The law of supply governs the behavior of sellers of productive resources.
Supply of Labor
- In the case of labor beyond and certain point further increase in wage rates reduces man-hour of labor due to greater desire of people for leisure.
Labor Market
The labor market is composed of demand for labor and supply for labor. Their interaction results ultimately to an equilibrium wage. The equilibrium wage is located at the intersection of the demand and supply curves.
A wage higher than equilibrium wage creates a labor surplus. A wage lower than the equilibrium wage creates a labor-shortage.
Income Distribution
It is the allocation of income among the owners of the factors of production.
Karl Marx – father of modern socialism
Types of Income Distribution
1. Personal Distribution (Household) - It is the allocation of income among persons or households
Lorenz Curve
-the area from the line of perfect equality to the Lorenz curve shows the degree of income inequality.
A wage higher than equilibrium wage creates a labor surplus. A wage lower than the equilibrium wage creates a labor-shortage.
Income Distribution
It is the allocation of income among the owners of the factors of production.
Karl Marx – father of modern socialism
Types of Income Distribution
1. Personal Distribution (Household) - It is the allocation of income among persons or households
Lorenz Curve
-the area from the line of perfect equality to the Lorenz curve shows the degree of income inequality.
2. Functional Distribution (Factors of Production)
It is the allocation of income among the factors of production – land, labor, capital and entrepreneur. The incomes of the factors of production are rent for land, wages for labor, interest for capital and profit for the entrepreneur.
Causes of Income Inequality
Theories of Income Distribution
Pricing of Resources – refers to the payments of the factors of production
Wages – the price of labor
Real Wages – refer to the number of goods and services that a worker can buy with his money wage.
Determinants of Wage Rates
Economic Rent
Rent – payment for the use of land and other natural resources which are completely fixed in total supply
Henry George – economic rent is the cause of poverty
Single tax – key to progress
- Rent should be taken by the government in the form of tax then spend it for the progress of society.
Interest rate – payment for using the money of other individual
Usury – the imposition of unreasonably high interest rate
Loan Sharks – those who charge extremely
Profit – are rewards for the entrepreneur
It is the allocation of income among the factors of production – land, labor, capital and entrepreneur. The incomes of the factors of production are rent for land, wages for labor, interest for capital and profit for the entrepreneur.
Causes of Income Inequality
- Intelligence and talents
- Education and training
- Unpleasant and risky jobs
- Ownership of productive factors
- Luck and connections
Theories of Income Distribution
- Marginal Productivity
- Needs
- Social Usefulness
- Equality
Pricing of Resources – refers to the payments of the factors of production
Wages – the price of labor
- Wage is the important price of the productive resources
- To most people, it is the only source of income
- One of the major reasons why most people are poor
Real Wages – refer to the number of goods and services that a worker can buy with his money wage.
Determinants of Wage Rates
- Supply Demand
- Minimum Wage
- Labor unions
Economic Rent
Rent – payment for the use of land and other natural resources which are completely fixed in total supply
Henry George – economic rent is the cause of poverty
Single tax – key to progress
- Rent should be taken by the government in the form of tax then spend it for the progress of society.
Interest rate – payment for using the money of other individual
Usury – the imposition of unreasonably high interest rate
Loan Sharks – those who charge extremely
Profit – are rewards for the entrepreneur