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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, but also for productive resources or factors of production: land, labor, capital and entrepreneur. The suppliers of goods and services in the product markets are the business firms and the buyers are the household. The incomes of household depend on the prices of their productive resources. Such incomes determine their ability to buy the goods and services offered by business firms. The equilibrium point of demand and supply determines the market price and the and the quantities of productive resources that are bought and sold. Clearly, the incomes of individuals depend on their ownership of productive resources and the prices of such resources.
pleasure, but for the production of goods or services Productivity- in general, the most productive resources have the highest demand, because they are the most efficient. Such resources provide maximum profits to the business firms. Price of other factor- factor substitutes and complementary resources affect the demand and productive resources. In highly developed countries, labor resource is scarce, and therefore very expensive. In industrial firms find it more economical to use machines as substitutes for labor this will reduce demand for labor
the employment of an additional man-hour of labor Marginal revenue product- the 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
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. The sellers of productive resources to the business firms depends on the prices of such resources. In general at higher prices, more productive resources are offered in the factor 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. They make their decision on personal interest but it doesnt necessarily mean profit maximization. Some individuals prefer leisure to an additional profit or income. Others are socially oriented. They are more concerned about their social responsibility than in accumulating more money. So they tend to get a job which they feel they can contribute something valuable to society although such jobs give them lower income.
Supply of Labor
More individuals are willing to work when wage
rates are higher. Generally this is true in an economy or society where there are abundant job opportunities. People can choose their jobs and their wages. The firms which offer the highest wage rates, together with the best working conditions and fringe benefits, attract most of the competent workers.
Labor Market
The market demand for labor constitutes all
the demands of all firm labor. Whenever wage rises, a firms demand for labor falls.
persons or households Functional distribution-allocation of income among the factors of production: land labor and entrepreneur
factor of production (or factor payment) is equal to the value of its marginal product.
individuals. Those who have more needs receive more income in proportion to their needs.
Jobs which are more useful to society are paid higher. members of society receive an equal amount of income.