Chapter 18

Chapter 18 discusses the factors of production. The three most important factors of production are labor, land, and capital. The economy’s income is distributed in the markets for the factors of production. Competitive, profit- maximizing firms hire each factor up to the point at which the value of the marginal product of the factor equals its price. Because factors of production are used together, the marginal product of any one factor depends on the quantities of all factors that are available. As a result, a change in the supply of one factor alters the equilibrium earnings of all the factors. Each factor of production has its own components. For example, the supply of labor arises from individuals’ tradeoff between work and leisure. An upward-sloping labor supply curve means that people respond to an increase in the wage by enjoying less leisure and working more hours. One of the ideas you get out of this chapter is that in order to maximize profit, firms hire workers up to the point where the value of the marginal product of labor equals the wage. This idea is similar to what we have just learned when trying to maximize profit, but instead of how much of a good to produce it is how many workers to hire, thus a factor of production.

            Chapter 18 begins to expand on the idea of markets by further discussing what goes into a creating a market. It is very interesting to see what it takes for a market to function and makes learning about market function a lot more realistic.