1. CHAPTER 6FACTOR MARKETS AND INCOME DISTRIBUTION

2. Market Economy Free interaction between the forces ofsupply and demand Not only markets for goods and services Also for productive resources or factors ofproduction: land, labor, capital and entrepreneur Business firm suppliers of goods and servicesin the product markets Households - buyers 3. 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. 4. DETERMINANTS OF FACTOR DEMAND cont.. ProductivityMost productive resources have the highest demand,because they are the most efficient. Technology Plays a key role in the productivity of the factors ofproduction. Modern machines are more efficient than primitivetools of production. 5. DETERMINANTS OF FACTOR DEMAND cont.. The prices of factor substitutes andcomplementary resources affect the demand forproductive resources. - Industrial firms find it more economical to use machines as substitutes for labor. 6. Demand for Labor Like the quantity demanded for goods in relationto prices, the quantity demanded for labor hasan inverse relationship with wage rates. Marginal Product is the additional outputproduced by the employment of an additionalone hour of labor. Marginal Revenue Product of Labor additionalrevenue (income) obtained by selling themarginal product of labor. Marginal Resource Cost payment of theadditional man-hour of labor and otherproductive resources like land and capital. 7. 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 firms 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. 8. Supply in the Factor Market Law of Supply governs the behavior of resources inthe factor market just like the behaviorof goods and services in the productmarket. Household sellers of productive resources land,labor, capital & entrepreneur. High prices more productive resourcesare offered in the factor market. 9. Supply of Labor Individuals are willing to work when wage ratesare higher. Firm which offers the highest wage ratetogether with the best working conditions andfringe benefits, attract most of the competentworkers Poor economies, job are scarce. 10. Supply of Labor continue.individual supply of labor wageZOquantity of labor (hours) Backward binding supply curve for labor shows that above wage Z,individuals want more leisure when wage increases. This reduces thequantity of labor. Below wage Z, which is a lower wage, they want lessleisure and supply more labor. 11. Labor Market Economics Labor Topic 12. Topics Labor Market Labor Market Map Labor Market for Teachers Income Distribution Types of Income Distribution Personal Distribution Functional Distribution 13. Labor Market The market demand for labor constituteall the demands of all firms for labor.Whenever wage rises, a firms demandfor labor falls. This makes the demandcurve downward sloping. In the case ofmarket supply of labor, it is the sum ofall individuals supply of labor. Thesupply curve, work hours also increase.But beyonda certain point, further wageincrease results in a decrease in workhours. 14. MARKET SUPPLY OF LABORXLABOR MARKET MAPYMARKET DEMAND FOR LABORWO W V R U Q 15. Labor Market for Teachers Our country has a labor surplus. Evencollage graduates find it extremely hardto get a suitable job. Out economygenerates a very limited number f newjobs. Every year our labor population hasbeen increasing much faster than oureconomy can create new jobopportunities. Thus, with tremendousincrease in both local and foreigninvestments, this will certainly absorbour labor surplus 16. Income Distribution Is the allocation of income among theowners of the factors of production.There are various ideas or theories ofincome distribution. Misdistribution of income and wealthamong the less developed countries hasbeen more wide spread. The gap of therich and the poor is getting wider andwider. Only few are rich while most ofthe people exist under the poverty line. 17. Types of Income Distribution Personal Distribution Allocation of income among personsor households. The degree of incomeinequality among households orfamilies (shown in the Lorenz curve). 18. Perfect Equality Lorenz CurvePERCENT OF INCOMEPERCENT OF FAMILIES 19. Functional Distribution Is the allocation of income amongthe factors of production: land,labor, capital and entrepreneur. Theincome of the factors of productionare rent for land, wages for labor,interest for capital, and profits forentrepreneur. 20. Causes of Income Inequality 21. 1. Intelligence and talents Individuals who are more intelligent and talented aremore 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 inorder to eat three times a day. 22. 4. Ownership of productive factors. families who own most of the productive factors like land,machines, buildings and so forth. These are the ones whoare rich. They derive big incomes from their properties. 5. Luck and connections. These are the people who won first prize in lotterieswhich is lucky and likewise the people with bigconnection are more likely to succeed. 23. Theories of Income DistributionMarginal productivity Holds that the income of the factor of production(or factor payment) is equal to the value of itsmarginal productionNeeds Determine the amount of income of families or individuals. Those who have more needs receive more income in proportion to their needs. 24. Social usefulness Jobs which are useful to society are paid higher.Equality Refers to an income distribution in which all membersof society receive an equal amount of income. 25. Pricing of Resources Pricing or resources refers to payments of the factorsof production. As stated earlier, factor prices offactor payments are determined by the law of supplyand demand. However, due to the limitations of themarket forces, the government interferes to a certaindegree, in the pricing of productive resources toprotect the interest of the workers who constitute agreat majority of the productive resources. 26. Wages the Price of Labor Wage is the most important price of theproductive resources. To most people, wage orsalary is the only source of income. 27. Determinants of wage rate are:1. Supply and demanddemand for workers > supply of workers = wage ratedemand for workers < supply of workers = wage rate 28. 2. Minimum wageThe government imposes minimum wage rates for variousworkers like those in the industrial and agriculturalsectors. The objectives of such wage determination is thedesire of the government to protect the interest of thelow income workers in relation to the increasing cost ofliving. 29. 3. Labor UnionsMore active labor unions are likely to protect and promotethe legitimate interest of their members against theexploitation of their employers. 30. Economic Rent Payment for the use land and otherresources which are completely fixed intotal supply 31. R2 ----------------------------- D2RENT R1 ----------------------------- D1 R----------------------------- DQLAND 32. Land rent is an unearned incomeDavid Ricardo Henry George Adam Smith 33. 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 34. Interest rate Payment for using the money of other individuals or institution such as banks. Money is not a productive factor. It cannot producegoods and services. Its only function is only as amedium of exchange. 35. Profit Earnings of a firm after deducting the cost ofproduction, 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 theentrepreneur as a factor of production. Business Profit it is the excess of thecomputed explicit cost 36. End of Chapter - 6Factor Marketsand Income DistributionGroup VDe Guia, Dexter RaymondDelos Santos, Randy Sanchez, Michelle Dalojo, Laura Mae