Econ Unit 5 Notes Chapter 15 Pricing the Factors of Production Income is distributed when the market pays for

r factors of production (inputs used to make goods) These inputs are sold based on supply and demand Therefore the income distribution is dependent on the prices and quantities of these factors Factors of Production: Land, Labor, Capital, Exhaustible natural resources, Entrepreneurship Entrepreneurship: Act of starting new firms, introducing new products and technical innovation, RISK TAKERS Marginal Physical Product (MPP): is the increase in output that results from a one-unit increase in the use of the input (Ex: How much more work is that fourth employee doing) Economists analyze factor prices in terms of supply and demand The supply sides for the various factors differ enormously must analyze each separately One basic principle: Principle of marginal productivity - A firm will want _____ units of an input if it costs _____ dollars - In competitive factor markets, the profit maximizing firm will hire/buy the quantity at which:

MRP = P of the input

Logic behind the principle pg 298 - Demonstrates that the quantity demanded of an input declines as the input price rises (down slope) Inputs and derived demands