Markets for Factors of Production and Economic Inequality

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Labor: The physical and mental work effort used to produce goods and services. The price of labor is the wage rate.
Capital: Tools, machines, buildings, and other constructions used to produce goods and services. The price of capital is the rental rate.
Land (Natural Resources): All gifts of nature. The price of land is the rental rate.
Entrepreneurship: The profit or loss resulting from business decisions. Entrepreneurial services are not traded in markets.

Derived Demand: The demand for a factor of production is derived from the demand for the goods and services it helps produce.
Profit Maximization: Firms hire quantities of factors of production to maximize profit.
Decision Rule: Firms compare the cost of hiring an additional unit of a factor with its value to the firm.
Factor Price: The cost of hiring an additional unit of a factor of production.
Value of Marginal Product (VMP): The price of a unit of output multiplied by the marginal product of the factor.

The value of marginal product of labor tells us the revenue a firm earns by hiring one more worker.
The wage rate tells us what an additional worker costs a firm.
Firms maximize profit by hiring labor up to the point where the value of marginal product equals the wage rate.
The demand for labor curve slopes downward because the value of marginal product diminishes as the quantity of labor increases.

Number of Workers	Marginal Product	Price of Output	Value of Marginal Product
1	10	$2	$20
2	8	$2	$16
3	6	$2	$12
4	4	$2	$8
5	2	$2	$4

Additional info: Table values are illustrative and based on typical textbook examples.

Movements along the curve: Caused by changes in the wage rate.
Shifts of the curve: Caused by changes in the price of the firm's output, prices of other factors of production, or technology.

Many firms demand labor, and many households supply labor.
The market demand for labor is the sum of all firms' labor demands at each wage rate.
The market supply of labor is the sum of all households' labor supply decisions.

Income Effect: Higher wage rates increase income, which can increase demand for leisure and decrease labor supplied.
Substitution Effect: Higher wage rates increase the opportunity cost of leisure, increasing the quantity of labor supplied.

The market supply curve shows the quantity of labor supplied at each wage rate.
Equilibrium wage rate is where quantity of labor supplied equals quantity demanded.

Labor Union: An organized group of workers aiming to increase wage rates and improve job conditions.
Influences on Labor Supply: Unions can restrict supply by controlling entry into professions or influencing job standards.
Influences on Labor Demand: Unions can increase demand for labor by increasing productivity, lobbying for restrictions, supporting minimum wage laws, and lobbying for restrictive immigration laws.

Demand for Capital: Derived from the value of marginal product of capital.
Supply of Capital: Increases as the rental rate rises.
Equilibrium Rental Rate: Where quantity of capital demanded equals quantity supplied.
Rent-versus-Buy Decision: Firms compare present expenditure with future rental cost.
Present Value:
Future Amount:

Demand for Land: Derived from the value of marginal product of land.
Supply of Land: Fixed; perfectly inelastic.
Equilibrium Rental Rate: Where quantity of land demanded equals quantity available.

Nonrenewable Resources: Oil, gas, coal. Once used, cannot be reused, but some can be recycled.
Demand for Oil: Influenced by value of marginal product and expected future price.
Supply for Oil: Influenced by known reserves, production facilities, and expected future price.
Equilibrium: Determined by the intersection of demand and supply, considering marginal cost of extraction and expected future prices.

Income Lorenz Curve: Shows cumulative percentage of income against cumulative percentage of households.
Gini Ratio: Area between the Lorenz curve and the line of equality, divided by the area beneath the line of equality.
Distribution of Wealth: Wealth is distributed more unequally than income.

Poverty: When a household's income is too low to buy basic necessities.
Relative Poverty: Poverty compared to what is regarded as normal or average in society.
Absolute Poverty: Extreme poverty threatening survival (e.g., living on less than $400/year).
Global Comparison: Income is most unequally distributed in Brazil and South Africa, least in Finland and Sweden.

Human Capital: Differences in education and skills affect wage rates.
Discrimination: Wage differences due to race, gender, or other biases.
Contests among Superstars: Large income differences due to unique talents or market size.