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CHAPTER 12Factor Markets and the Distribution of

Income<Review Slides>

PowerPoint® Slides by Can Erbil

© 2004 Worth Publishers, all rights reserved© 2004 Worth Publishers, all rights reserved

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What you will learn in this chapter:

Factor distribution of incomeMarginal productivity theory of income distributionWage disparities and discriminationTime allocation and individual labor supply

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Factor Distribution of Income in the United States in 2003

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The Production Function for George and Martha’s Farm

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The Value of the Marginal Product Curve

P x MPL or P x MPP (AP) = VMPL or MRP (AP)

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Equilibrium in the Labor Market

Each firm will hire labor up to the point at which the value of the marginal product of labor is equal to the equilibrium wage rate.

VMPL = Wage or MRP = Wage (AP)

In equilibrium, the marginal product of labor will be the same for all employers.

So the equilibrium (or market) wage rate is equal to the equilibrium value of the marginal product.

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Shifts of the Value of the Marginal Product Curve (Derived Demand Curve). If the price of the good that is produced with labor changes, so will the value of the marginal product of labor.

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All Producers Face the Same Wage Rate

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Equilibrium in the Labor MarketThe market labor demand curve is the horizontal sum of the individual labor demand curves of all producers.

Labor is paid its equilibrium value of the marginal product, the value of the marginal product of the last worker hired in the labor market as a whole.

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Wage Disparities in Practice

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Earnings Differentials by Education, Gender, and Ethnicity, 2002

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Market powerCompensating Differentials

Danger/Unattractiveness of JobTalent/Human Capital

Unions Collective Bargaining

Efficiency-wage modelNanny Example

Discrimination

Marginal Productivity and Wage Inequality

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The Individual Labor Supply Curve

If the income effect dominates, a rise in the wage rate can actually cause the individual labor supply curve to slope downward!!!

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The End of Chapter 12

coming attraction:Chapter 13:

Efficiency and Equity