Chapter 13
Introduction
to the Factor
Markets
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Factor
Definition
Return/payment
Example: Pat’s
Deli
Land
Anything supplied by nature
Rent
that helps in the production of
Physical land that
the deli is built on
wealth
Labour
Human activity directed towards
Wages
the production of wealth
Capital
Anything man made that helps
serve customers
Interest
in the production of wealth
Enterprise
A person who combines the
Staff to cook and
Pat’s Deli uses
fridges, ovens
Profit/loss
Pat the risk taker
other factors of production,
takes the initiative and risk in
setting up a firm
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Factors of Production Definitions
 Derived demand suggests that a factor of
production is demanded for its contribution to the
production process.
 A specific factor of production is one that is so
specialised that it doesn’t have many different uses.
 A non-specific factor of production can have
many different uses.
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Factors of Production Definitions
(Continued)
 Occupational mobility is the ease with which
a factor of production can move from one
occupation to another.
 Geographical mobility is the ease with which
a factor of production can move from one area
to another.
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Demand for Factors
of Production
 Demand for the factors of production is the
amount of a factor that will be used and will be
determined by its contribution to the business
and the price that has to be paid for that factor.
 The marginal revenue productivity of a
factor is the extra revenue earned when an
additional unit of a factor of production is
employed.
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MRP Curve
 The MRP curve is the demand curve for labour.
It shows the quantity of labour that will be
demanded at each wage rate.
 The MRP curve of any of the four factors of
production is its demand curve.
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Why does the MRP curve slope
downwards from left to right?
 The law of diminishing returns – As more
workers are employed, their marginal product
will begin to decline. As a result, the MRP of
each extra worker is less than the previous
employee.
 The law of demand
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MRP Theory of Wages
The MRP theory of wages states that each
worker is paid an amount equal to the additional
revenue that is received from the employment of
the last worker.
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Labour Hoarding
On occasion, a firm may continue to employ
labour even though it is unprofitable to do so.
This can occur because:
 Management may feel that demand is likely to
improve and more workers would be required in
the future.
 Retaining existing workers is easier than
retraining new staff.
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What influences MRP?
 The productivity of the factor
 The MR/selling price of the output
 The law of demand (elastic/inelastic demand
curve)
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Is MRP (price of a factor of
production) easy to calculate?
MRP is quite difficult to measure:
 How do you value the contribution of a care
assistant in a hospital or the contribution of a
policeman?
 If capital and labour are required to carry out a
task, how do you allocate the MRP to either
capital or labour?
 How do you measure the MRP of a service not
sold on the market?
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MRP in Perfectly
Competitive Markets
In perfect competition:
 The price for the individual firm’s output is
constant
 MPP x price = MRP
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MRP and Imperfect
Competition and Monopoly
In both imperfect competition and monopoly:
 The price of goods needs to be lowered in order
to sell a higher quantity
 MPP x AR will not equal MRP
 In a market structure that has a
downward sloping demand curve,
MRP = MPP x MR.
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What Influences MPP?
Marginal physical product is the extra output
produced when an additional unit of factor of
production is employed. It is influenced by:
 Quality/specialised nature of the factors
 Training/education provided for the factors
 Expertise of the entrepreneur
 Law of diminishing marginal returns
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Supply Price and
Transfer Earnings
 The supply price of a factor of production is
the minimum payment necessary to bring a
factor into use and maintain it in that particular
use.
 Transfer earnings refer to the earnings of a
factor of production in the next best alternative
employment OR what a factor must receive to
keep it in its present use and prevent it from
transferring to another use.
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Economic Rent and
Quasi Economic Rent
 Economic rent refers to any earnings of a
factor above its supply price.
 Quasi economic rent refers to economic rent
of a temporary nature.
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Factors Affecting
Transfer Earnings
 Productivity of the factor
 Length of time
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Alfred Marshall (1842–1924)
 Utility theory
 Quasi economic rent
 Power of competition
 Developed economic concepts
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