ECONOMICS 200
PRINCIPLES OF MICROECONOMICS
Professor Lucia F. Dunn
Department of Economics
1
Distribution of Income
1.
Functional Distribution: Refers to which factors of
production get what fraction of the total national income.
- National Income = rents + wages + salaries + interest + profits
So: Rents go to landlords, wages and salaries go to labor, interest
goes to capital owners, profits goes to entrepreneurs.
2. Size Distribution of Income: Refers to how income is
distributed to certain fractions of the population.
Ex. What fraction of total national income goes to the top 20% of
income-earners, the bottom 20%, etc.
2
Income Distribution
Lorenz Curve
% of household income earned
100
45o line represents complete equality.
80
60
40
20
45o
0
20
40
60
% of households
80
100
3
Demand In Factor Markets
– Call “Derived Demand” because it is derived from
demand for final product.
Wage Rate
Total Labor Market
S
2
w2
1
w1
D2
D1
Q1
Q2
Quantity of Labor
If demand for automobiles increases, the demand for
auto workers will increase.
4
The Individual Firm’s Decision on Factor Use
Profit-Maximizing Hiring Rule for Any Factor
of Production Says hire up to point where:
Marginal Cost of Hiring = Marginal Revenue
Product from Hiring.
OR
MC = MRP
 MRP = MPP  MR
If all markets are competitive, then MR=P.
(1) So: MRP = MPP  PProduct
All workers (of a certain type) are paid the same wage.
(2) So: MC = Wage
5
Quantity of Product
Marginal Revenue Product Curve
MPP
Q of Labor
$
MPR = MPP  PProduct
Q of Labor
The MRP curve becomes the firm’s demand curve for the factor.
6
The Individual Firm’s Decision on Factor Use
How Is the Going Wage Rate Set?
w
w
S


w
w
S=MC
0
QLabor
D
0
QLabor
Total Labor Market
One Firm
7
The Individual Firm’s Decision on Factor Use
Wage
WO
S=MC
MRP=D
LO
Q of Labor
Wage
If wage changes, firm always
goes to point where MRP=W.
W3
W2
W1
MRP
 So the MRP curve is the
demand curve for labor for the
firm.
8
Q of Labor
The Individual Firm’s Decision on Factor Use
So the return a factor earns should be equal to the MRP,
or the value of what it is contributing to a firm’s
revenues in equilibrium.
9
The Individual Firm’s Decision on Factor Use
What Determines the Elasticity of a
Derived Demand Curve:
(1) The larger the proportion of total cost accounted
for by the factor, the more elastic will be the
demand for it.
(2) The more elastic the demand for the final
product, the more elastic will be the demand for
the factor that makes it.
10
Factors Influencing the Supply of Labor
1. Population
2. Labor Force Participation
No. in Work Force
Labor Force
=
Participation Rate
Total Population
3. Hours of Work
11
Economic Rent
If a factor of production gets paid more than is necessary to
keep it from moving to another use, we say it is earning an
“economic rent”.
“Transfer earnings” are the amount just necessary to prevent a
factor from moving.
Economic rent is common in the entertainment and sports areas.
p
S1
NOTE: The steeper (i.e.,
move inelastic) the supply
curve a factor, the greater
will be its economic rent.
Econ. Rent
Transfer
Earning
D
Q
12
Economic Rent
Case I : Perfectly Elastic Supply
p
Case II : Perfectly Inelastic Supply
p
PO
S
S
PO
D
0
QO
 no economic rent
Q
D
0
QO
 all payment to factor is
economic rent
Q
13
14