ECO III - CCSAD GROUP V Presentation

1. CHAPTER 6
FACTOR MARKETS
AND INCOME DISTRIBUTION

2. 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

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..
• 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.

5. 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.

6. 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.

7. EMPLOYMENT DECISIONS
1. 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.

8. 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.

9. 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.

10. 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.

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 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.

14. MARKET SUPPLY OF LABOR
X
LABOR MARKET MAP
Y
MARKET DEMAND FOR LABOR
W
O W V R U Q

15. 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

16. 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.

17. 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).

18. Perfect Equality
Lorenz Curve
PERCENT OF INCOME
PERCENT OF FAMILIES

19. 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.

20. Causes of Income Inequality

21. 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.

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 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.

23. Theories of Income Distribution
Marginal productivity
• Holds that the income of the factor of production
(or factor payment) is equal to the value of its
marginal production
Needs
 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 members
of society receive an equal amount of income.

25. 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.

26. 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.

27. 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

28. 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.

29. 3. Labor Unions
More active labor unions are likely to protect and promote
the legitimate interest of their members against the
exploitation of their employers.

30. Economic Rent
• Payment for the use land and other
resources which are completely fixed in
total supply

31. R2 -----------------------------
D2
RENT R1 -----------------------------
D1
R -----------------------------
D
Q
LAND

32. Land rent is an unearned income
David 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 produce
goods and services. It’s only function is only as a
medium of exchange.

35. 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

36. End of Chapter - 6
Factor Markets
and Income Distribution
Group
–V
De Guia, Dexter Raymond
Delos Santos, Randy
Sanchez, Michelle
Dalojo, Laura Mae