FMA - Factor Markets Overview

Factor Markets Overview

Introduction

To adequately cover economic interaction in this course, it is necessary to explore all parts of the circular flow. We have taken a detailed look at the product markets in which goods and services are bought and sold. Now it is time to investigate decision-making in the factor, or resource, markets in which businesses buy the factors of production. Through the exploration of the various market types in which inputs can be bought and sold, you can analyze how income is distributed in the economy (between labor and capital) and the role that distribution plays in income inequality.

Essential Questions

1. 1. What is meant by derived demand?
   2. How do a factor's MP and MRP affect the demand for that factor?
   3. How does MFC (or MRC or MCL) affect the allocation of these resources?
   4. How does the market determine the distribution of income?
   5. How do the supply curves and MFC curves for labor differ between perfectly competitive factor markets, non-discriminating factor markets, and perfectly discriminating factor markets?
   6. How do changes in minimum wage laws impact labor markets?
   7. What role do unions play in determining wage rates in labor markets?
   8. How is the cost minimizing combination of labor and capital determined?

Key Terms

Click here to download the key terms document for this module. Links to an external site.

Derived Demand – demand for a resource arises from the demand for the goods produced by the resource.

Marginal Revenue Product (of labor) – MRP_L is the change in a firm’s total revenue from the hiring of an additional unit of an input.

Marginal Factor Cost (Marginal Resource Cost or Marginal Cost of Labor) – the change in a firm’s total cost from the employing of an additional unit of an input.

Monopsony – a factor market in which there is a sole firm that has market power (that is, the firm is a wage setter).

Perfectly Discriminating Monopsony – a type of monopsony in which additional workers are paid more than previous workers and wage = MCL (or MRC or MFC).

Non-discriminating Monopsony – a type of monopsony in which all workers are paid the wage given to the last worker hired; as a result, MCL > Wage.

Bilateral Monopoly – a market structure with a monopoly (single seller) and a monopsony (single buyer).

Lorenz Curve – this curve is a graphical device that shows how a nation’s income is distributed across the nation’s households.

Gini Coefficient – the index used as a measure of income inequality; a coefficient closer to zero means income is more evenly distributed; a coefficient closer to one means income is less evenly distributed.

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