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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

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.

Determinants of Factor Demand


Derived demand- a firm buys a machine not for satisfaction or

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

Demand for Labor


Marginal product- additional output produced by

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 in the Factor Market

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.

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

Causes of Income Inequality


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

Theories of income Distribution


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

Theories of income distribution


Marginal Productivity- holds that the income of the

factor of production (or factor payment) is equal to the value of its marginal product.

Needs- determine the amount of income of families or

individuals. Those who have more needs receive more income in proportion to their needs.

Social Usefulness- is the basis of income distribution.

Jobs which are more useful to society are paid higher. members of society receive an equal amount of income.

Equality- refers to an income distribution in which all

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