Final Examination

1
Final Examination

• Monday, December 15
• 1030 1230
• NOTE The exam will be in LC 7 not LC 1.

Extra office hours (BA 111A) Thursday,
December11 230 - 430 Sunday, December 14 230
- 430
Chapters covered on exam 1-8, 10-11, 13-15, and
18 (60 to 65 percent of the exam will be drawn
from chapters 13, 14 and 15 and to a much lesser
extent chapter 18.)
2
Factor Markets and the Distribution of Income

• Chapter 18
• Pages 437-446 of chapter 20

3
The Circular-Flow Diagram
Market for Goods and Services
Firms
Households
Market for Factors of Production
4
Market for a Factor of Production
5
Price-taking firms decision regarding the
quantity of an input to employ.

• The value of the marginal product of an input,
  VMP, is the marginal product of the input times
  the price of the output VMP MPP.
• Example Suppose that the MPL is 1.5 shirts per
  hour and the price of shirts is 6 per shirt. A
  worker working one hour will yield the firm 9.00
  in additional revenues.

6
Suppose that the market price of the output
produced by a firm is 0.50 per unit and the
market price of labor is 8.00 per hour.
7
A firms demand for an input is based upon the
inputs VMP, which depends upon the inputs
marginal productivity and the outputs value
(price) in the market VMP MP P.
8
Markets for Factors of Production
labor market
9
Marginal Productivity Theory of Income
Determination

• In a market economy the distribution of income
  depends upon the distribution of resource (input)
  ownership and the prices of those factors of
  production.
• The prices of inputs are determined by supply and
  demand in the markets for those inputs.
• The importance of the marginal productivity of
  inputs in determining the distribution of income
  follows from the fact that the demands for inputs
  directly depends upon the values of their
  marginal products.

10
The Market Determination of Wages
market for high skilled workers
market for lower skilled workers
SH
SL
WH1
DH
WL1
DL
LH1
LL1
11
The Distribution of Income in the United States
1998
12
Average Annual earnings by Educational Attainment
13
Why has the gap in earnings between skilled and
unskilled workers risen in recent years?

• International trade has altered the relative
  demand for skilled and unskilled labor.
• Changes in technology have altered the relative
  demand for skilled and unskilled labor.

14
The Market Determination of Wages
15
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16
Principles of Economics

• Markets are usually a good way to organize
  economic activity.
• Governments can sometimes improve economic
  outcomes.