Unit 5: Factor Markets — Resources and Distributions

Land

Includes all natural resources (dirt, water, oil, minerals) used in production.

Capital (Physical Capital)

Manufactured goods used to produce other goods (machines, factories, tools, robots).

Economic Rent

The payment made to a factor of production in excess of the minimum amount necessary to keep it employed in its current use.

Marginal Revenue Product of Capital ($MRP_K$)

The additional revenue generated from employing one more unit of capital.

Interest Rate

The cost of borrowing funds or the opportunity cost of using one's own cash.

Perfectly Inelastic Supply

A situation where the supply does not change regardless of the price, represented by a vertical supply curve.

Derived Demand

Demand that arises due to the demand for another good or service, commonly seen in the context of labor and capital.

Law of Diminishing Returns

The principle that as more of a variable input is added to fixed inputs, the additional output produced will eventually decrease.

Least-Cost Combination Rule

The principle that firms should adjust inputs until the marginal product per dollar is equal for all factors.

Compensating Differentials

Additional income provided to workers for jobs that are dangerous, unpleasant, or risky.

Marginal Product of Labor ($MP_L$)

The additional output generated by hiring one more unit of labor.

Gini Coefficient

A mathematical ratio derived from the Lorenz Curve that measures income inequality.

Lorenz Curve

A graphical representation of income distribution that shows the proportion of total income earned by cumulative percentages of a population.

Financial Capital

The money used to purchase physical capital.

Opportunity Cost

The cost of forgoing the next best alternative when making a decision.

Investment Rule

A principle stating that a firm should purchase capital if the expected rate of return on the capital is greater than or equal to the interest rate.

Barriers to Entry

Obstacles that prevent new competitors from easily entering a market, e.g., occupational licenses.

Human Capital

The accumulated training, skills, and education of workers, which can influence productivity and wages.

Rental Price

The payment made for the use of land, which is determined by demand.

Vertical Supply Curve

A graphical representation that indicates that the quantity supplied remains constant regardless of price changes.

Marginal Product of Capital ($MP_K$)

The additional output produced by employing one more unit of capital.

Income Inequality

The unequal distribution of income within a population.

Discrimination

Unfair treatment of individuals based on characteristics such as race, gender, or age, affecting their wages and job opportunities.

Profit-Maximization Rule

The principle that firms maximize profit by hiring labor until the marginal revenue product of labor equals the marginal resource cost.

Elasticity of Supply

The degree to which supply quantity responds to changes in price.

Cumulative Income Distribution

The distribution of total income earned by various segments of the population.