Chapter 18

Chapter 18 move away from discussing about different types of markets, and instead focuses on the factors of production. Factors of production are the inputs that create good and services. The three biggest and most important ones are labor, land, and capital. The demand for these factors is controlled by the firms that use them to produce goods and services. The supply for the factors is determined by individuals' trade-off between work and leisure time. This trade-off can be changed based on wage, as the higher the wage, the more work people are willing to do. Profit maximizing firms use each factor till the marginal product of the factor is equal to the price. The marginal product of labor is the increase in the quantity of output for each additional unit of labor. The value of the marginal product is determined by the marginal product of an input times the price of the output. The marginal product of a specific factor relies on the amount of all other factors. Thus a supply change for one factor offsets the equilibrium earnings of all of the other factors. The labor factor is much different than capital, which is the equipment and structures that are used to produce goods and service. Labor, land, and capital each earn the value of their marginal contribution towards the production process. The equilibrium purchase price for land or capital is determined by the current value of the marginal product and the expected value of it in the future.