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Objectives:  To determine the factor markets and income distribution  To discuss about the determinants of factor demand  To explain the meaning of demand for labor  To study the supply in the factor market  To identify and explain the supply of labor  To understand what the labor market means  To explain and identify the types of income distribution  To understand what causes income inequality  To discuss the theories of income distribution .

Clearly. The suppliers of goods and services in the product markets are the business firms and the buyers are the household.In a market economy where there is free interaction between the forces of supply and demand there are not only markets for good and services. the incomes of individuals depend on their ownership of productive resources and the prices of such resources. capital and entrepreneur. Such incomes determine their ability to buy the goods and services offered by business firms. The incomes of household depend on the prices of their productive resources. labor. . The equilibrium point of demand and supply determines the market price and the and the quantities of productive resources that are bought and sold. but also for productive resources or factors of production: land.

Such resources provide maximum profits to the business firms.in general. but for the production of goods or services  Productivity.  Price of other factor. and therefore very expensive. labor resource is scarce. because they are the most efficient.a firm buys a machine not for satisfaction or pleasure.factor substitutes and complementary resources affect the demand and productive resources. the most productive resources have the highest demand.Determinants of Factor Demand  Derived demand. In highly developed countries. In industrial firms find it more economical to use machines as substitutes for labor this will reduce demand for labor .

payment of the additional man-hour of labor – and other productive resources like land and capital .additional output produced by the employment of an additional man-hour of labor  Marginal revenue product.Demand for Labor  Marginal product.  Marginal resource cost.the additional revenue (income) obtained by selling the marginal product of labor.

Others are socially oriented. more productive resources are offered in the factor market.The law of supply governs the behavior of resources in the factor market just like the behavior of goods and services in the product market. However supply of productive resources is not without certain limitations. The suppliers of goods and services have one common goal: profit maximization-all economic decisions are based on the production costs and product prices. Supply in the Factor Market . In general at higher prices. So they tend to get a job which they feel they can contribute something valuable to society although such jobs give them lower income. Some individuals prefer leisure to an additional profit or income. They make their decision on personal interest but it doesn’t necessarily mean profit maximization. The sellers of productive resources to the business firms depends on the prices of such resources. They are more concerned about their social responsibility than in accumulating more money.

. together with the best working conditions and fringe benefits. Generally this is true in an economy or society where there are abundant job opportunities.Supply of Labor  More individuals are willing to work when wage rates are higher. attract most of the competent workers. People can choose their jobs and their wages. The firms which offer the highest wage rates.

Whenever wage rises. . a firm’s demand for labor falls.Labor Market  The market demand for labor constitutes all the demands of all firm labor.

Types of income distribution  Personal distribution-the allocation of income among persons or households Functional distribution-allocation of income among the factors of production: land labor and entrepreneur .

and no amount of hard work can change it. It is whom you know that matters. and risky.In highly developed countries. difficult. It has been said that the destiny of a person has been made. 2. Likewise.Only few families own most of the productive factors like land. Those who win first prizes in lotteries are lucky. Unpleasant and Risky jobs. Intelligence and Talents. Those who are born rich are fortunate. people with big connections are more likely to succeed in life. Education and Training. 3. Such unjust distribution of wealth and income is the root of poverty. 4. buildings. and so forth. . Ownership of Productive Factors. employers provide financial incentives to work that is dirty. 5. They derive big incomes from their properties. machines. unpleasant.Individuals who are more intelligent and talented are more likely to earn more income.The more experienced old folks claim that it is luck that counts much.Those with higher levels of education and training generally get higher incomes.Causes of Income Inequality 1. These are the ones who are rich. Luck and Connections.

Naturally. Apparently.Theories of income Distribution The various economic systems have different concepts and practices of income distribution. Labor is scarce and the demands for it is great. labor has the lowest price among the factors of production. the prices of the factors of production are determined by demand and supply forces. Under the free market economy. Because of its oversupply. The point is that the incomes of the owners of the factors of production are determined by market forces. Most of the people own only one factor of production-labor. The reason is that the supply of land is fixed while demand for land has been increasing due to rise in population and business activities. if only very few own incomes. millions are unemployed. the price of labor is high. there is nothing wrong with this. And in poor countries. . Thus. For instance. This means the income of the workers are sufficient to allow them to enjoy a decent living. rent which is the price of using land has been increasing. Of course it is entirely different in rich countries. But what is wrong and unjust is the distribution of the factors of production.

Jobs which are more useful to society are paid higher.   Social Usefulness.refers to an income distribution in which all . members of society receive an equal amount of income.   Needs.Theories of income distribution  Marginal Productivity.is the basis of income distribution.determine the amount of income of families or individuals.holds that the income of the factor of production (or factor payment) is equal to the value of its marginal product.   Equality. Those who have more needs receive more income in proportion to their needs.