The division of labor is the process of having different people at different stages of the production process. Population size (this mainly depends on birth rate, death rate, and net migration).What are the factors that determine the amount of labor resources? The ability of the worker to determine the value of the labor factor.The labor productivity of each worker is different (education varies depending on health).(Labor is measured in terms of time, and labor is lost as time goes on.) The existence of an interrelationship between labor and time.Labor is inseparable from the worker (it is inherent in man).Labor as a factor of production means all the mental and physical effort that can be applied to the production process. The rent paid for the use of the land is rent. Non-uniformity That is, the land takes different forms (location, climate, water resources, mineral resources).Generally speaking, the higher the degree of competition in factor markets and the lower the degree of competition in the final-product market, the higher the value of a producer firm. When assessing a firm’s future potential it is important not just to consider direct competition in its final-product market but also to look at the trends in its factor markets and their effects on its future performance. Good to knowĪ sound understanding of factor markets is imperative for making successful investments in the stock market. They use a general-equilibrium approach in their early paper, “‘Bargaining Power’ and Market Structures” (Journal of Political Economy, 1942). John Dunlop and Benjamin Higgins discuss how different forms of competition in factor markets can affect wages and prices across the economy. A general-equilibrium approach that encompasses knock-on effects and changes across multiple markets is thus required. By definition, ceteris paribus partial-equilibrium analysis is insufficient to understand the impact of a change in equilibrium in a factor market on the equilibria in related markets. This can lead to market failure and issues of antitrust. While such changes in ownership structure can help producers to control risk and increase efficiency, they also tend to reduce competition. In effect, sales contracts are then replaced by employment contracts and free, internal transactions between departments. Interdependencies between factor and product markets sometimes provide good reason for producers and suppliers to merge along the supply chain (so-called vertical integration). Producers can then find themselves squeezed between a high degree of competition in the markets for their final products and monopsony pressure in their factor markets. It could also be influenced by a government’s decision to implement a minimum wage or some other regulation. wages) are often affected by collective bargaining through trade unions. The labor market is a factor market where prices (i.e. This means that power is not equally balanced between buyers and sellers. However, in reality, most markets exist in some state of imperfect competition. If there were perfect competition in all markets, then the effects of a supply or demand shock from one market onto another’s prices would be relatively easy to calculate. As long as the last unit of input adds more to revenue than it does to cost (MRP > MC), it still makes economic sense to employ it. MRP depends on the market for the final product. MC is derived from prices in the factor market. When deciding how much of a production factor to employ, producers weigh its marginal cost (MC) against its marginal revenue product (MRP). This would result in the demand for steel by car producers to reduce. On the other hand, if the price of fuel increases, demand for cars will fall (see cross elasticity of demand). If the price of steel increases, then it should not take long for the supply of cars to lower, pushing up their price. Therefore, what is happening in one market can have a “ripple effect” on surrounding markets. It also hinges on labor markets for people to design and assemble the cars. For example, the market for cars depends on the markets for raw materials such as steel, rubber and glass. Simultaneously, producers are also buyers in the markets for its factors of production (demand D F below).įigure 1: Illustration of factor markets for a firm producing final good GĮconomic systems comprise many markets that are interlinked with one another. A producer is typically a seller in the market for a product (supply S G in the graph below). Factor markets (or resource markets) are markets for the inputs to production.
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