CHAPTER 6 FACTOR MARKETS AND INCOME DISTRIBUTION
Market Economy• Free interaction between the forces of supply and demand• Not only markets for goods and services• Also for productive resources or factors of production: land, labor, capital and entrepreneur Business firm – suppliers of goods and services in the product markets Households - buyers
DETERMINANTS OF FACTOR DEMAND• Direct Demand – The demand of goods and services – Individual buys a kilo of rice for consumption. – He purchase a radio for his pleasure.• Derived Demand – Case of productive resources – A firm buys a machine not for satisfaction or pleasure, but for the production of goods and services.
DETERMINANTS OF FACTOR DEMAND cont..• Productivity Most productive resources have the highest demand, because they are the most efficient.• Technology – Plays a key role in the productivity of the factors of production. – Modern machines are more efficient than primitive tools of production.
DETERMINANTS OF FACTOR DEMAND cont..• The prices of factor substitutes and complementary resources affect the demand for productive resources. - Industrial firms find it more economical to use machines as substitutes for labor.
Demand for Labor• Like the quantity demanded for goods in relation to prices, the quantity demanded for labor has an inverse relationship with wage rates.• Marginal Product – is the additional output produced by the employment of an additional one hour of labor.• Marginal Revenue Product of Labor – additional revenue (income) obtained by selling the marginal product of labor.• Marginal Resource Cost – payment of the additional man-hour of labor – and other productive resources like land and capital.
EMPLOYMENT DECISIONS1. If the marginal revenue product of the additional man-hour is greater than its wage, the additional man-hour adds more to the firm’s revenue than its cost.2. If the marginal revenue product is less than the wage, the firm reduces the number of man- hours.3. The firm maximizes its profits up to point where MRP is equal to MRC. Remember the MR=MC rule.
Supply in the Factor Market• Law of Supply – governs the behavior of resources in the factor market just like the behavior of goods and services in the product market.• Household – sellers of productive resources land, labor, capital & entrepreneur.• High prices more productive resources are offered in the factor market.
Supply of Labor• Individuals are willing to work when wage rates are higher.• Firm which offers the highest wage rate together with the best working conditions and fringe benefits, attract most of the competent workers• Poor economies, job are scarce.
Supply of Labor continue…. individual supply of labor wage Z O quantity of labor (hours)• Backward binding supply curve for labor shows that above wage Z, individuals want more leisure when wage increases. This reduces the quantity of labor. Below wage Z, which is a lower wage, they want less leisure and supply more labor.
Topics• Labor Market• Labor Market Map• Labor Market for Teachers• Income Distribution• Types of Income Distribution – Personal Distribution – Functional Distribution
Labor Market• The market demand for labor constitute all the demands of all firms for labor. Whenever wage rises, a firm’s demand for labor falls. This makes the demand curve downward sloping. In the case of market supply of labor, it is the sum of all individuals’ supply of labor. The supply curve, work hours also increase. But beyonda certain point, further wage increase results in a decrease in work hours.
MARKET SUPPLY OF LABORX LABOR MARKET MAPY MARKET DEMAND FOR LABORW O W V R U Q
Labor Market for Teachers• Our country has a labor surplus. Even collage graduates find it extremely hard to get a suitable job. Out economy generates a very limited number f new jobs. Every year our labor population has been increasing – much faster than our economy can create new job opportunities. Thus, with tremendous increase in both local and foreign investments, this will certainly absorb our labor surplus
Income Distribution• Is the allocation of income among the owners of the factors of production. There are various ideas or theories of income distribution.• Misdistribution of income and wealth among the less developed countries has been more wide spread. The gap of the rich and the poor is getting wider and wider. Only few are rich while most of the people exist under the poverty line.
Types of Income Distribution• Personal Distribution – Allocation of income among persons or households. The degree of income inequality among households or families (shown in the Lorenz curve).
Perfect Equality Lorenz CurvePERCENT OF INCOME PERCENT OF FAMILIES
Functional Distribution• Is the allocation of income among the factors of production: land, labor, capital and entrepreneur. The income of the factors of production are rent for land, wages for labor, interest for capital, and profits for entrepreneur.
1. Intelligence and talents• Individuals who are more intelligent and talented are more likely to earn more income.2. Education and Training Those with higher levels of education and training generally gets higher income.3. Unpleasant and risky job Individual are forced to take dirty and risky jobs in order to eat three times a day.
4. Ownership of productive factors. families who own most of the productive factors like land, machines, buildings and so forth. These are the ones who are rich. They derive big incomes from their properties. 5. Luck and connections. These are the people who won first prize in lotteries which is lucky and likewise the people with big connection are more likely to succeed.
Theories of Income DistributionMarginal productivity• Holds that the income of the factor of production (or factor payment) is equal to the value of its marginal productionNeeds Determine the amount of income of families or individuals. Those who have more needs receive more income in proportion to their needs.
Social usefulness• Jobs which are useful to society are paid higher.Equality Refers to an income distribution in which all members of society receive an equal amount of income.
Pricing of Resources• Pricing or resources refers to payments of the factors of production. As stated earlier, factor prices of factor payments are determined by the law of supply and demand. However, due to the limitations of the market forces, the government interferes to a certain degree, in the pricing of productive resources to protect the interest of the workers who constitute a great majority of the productive resources.
Wages – the Price of Labor• Wage is the most important price of the productive resources. To most people, wage or salary is the only source of income.
Determinants of wage rate are:1. Supply and demand demand for workers > supply of workers = wage rate demand for workers < supply of workers = wage rate
2. Minimum wage The government imposes minimum wage rates for various workers like those in the industrial and agricultural sectors. The objectives of such wage determination is the desire of the government to protect the interest of the low – income workers in relation to the increasing cost of living.
3. Labor UnionsMore active labor unions are likely to protect and promotethe legitimate interest of their members against theexploitation of their employers.
Economic Rent• Payment for the use land and other resources which are completely fixed in total supply
R2 ----------------------------- D2RENT R1 ----------------------------- D1 R ----------------------------- D Q LAND
Land rent is an unearned income David Ricardo Henry George Adam Smith
Single tax – key to progress Henry George claimed that economic rent is the cause of poverty. He proposed that rent should be taken by the government in the form of tax. Then spend this for the progress of society. Henry George
Interest rate Payment for using the money of other individuals or institution such as banks.• Money is not a productive factor. It cannot produce goods and services. It’s only function is only as a medium of exchange.
Profit• Earnings of a firm after deducting the cost of production, which include: – Explicit Cost – actual expenditure of a firm – Implicit Cost – payments to productive resources owned and self employed by a firm.• Normal Profit - the minimum payment for the entrepreneur as a factor of production.• Business Profit – it is the excess of the computed explicit cost
End of Chapter - 6 Factor Marketsand Income Distribution Group –V De Guia, Dexter Raymond Delos Santos, Randy Sanchez, Michelle Dalojo, Laura Mae