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Factors of Production
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The inputs used to produce goods and services
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Three most important factors of production
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1. Labor
2. Land
3. Capital
2. Land
3. Capital
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Derived Demand
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A firm's demand for a factor of production is derived from its decision to supply a good in another market (Ex: the demand for computer programmers is linked to the supply of computer software
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Labor
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The most important factor of production
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Supply and Demand
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Labor markets are governed by the forces of _______
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Derived Demand
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Labor markets are different from other markets because labor demand is a ___________
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Price Taker
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A competitive firm is a _______
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Little
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A market type in which a single firm has ________ influence on the price of the product or the wages of its workers
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Hire, produce
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A competitive firm only has to decide how many workers to _________ and how many products to _________
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Profit Maximizing
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A competitive firm is _________
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Workers, products
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Since a competitive firm is profit maximizing, it doesn't really care about the number of _________ it has or how many ________ it produces
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Profit
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The goal of a competitive firm is to maximize _______
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Size, amount
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To make a hiring decision, the firm must consider how the _______ of its workforce affects the ________ of output produced
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Production Function
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The relationship between the quantity of inputs used to make a good to the quantity of output of that good
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Margin
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Rational people think at the _______
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Marginal Product of Labor
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The increase in the amount of output from an additional unit of labor
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Increases, declines
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When the amount of workers __________, the MPL _________
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Diminishing Marginal Product
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The property whereby the marginal product of an input declines as the quantity of input increases
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Less
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As more and more workers are hired, each additional worker contributes _______ to the production
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Minus
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The profit from an additional worker is the worker's contribution to revenue _______ the worker's wage
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VMP
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The worker's contribution to revenue is equal to the _______
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Value of the Marginal Product
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The marginal product of an input times the price of an output
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Diminishes, rises
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Because the market price is constant for a competitive firm while the marginal cost declines with more workers, the value of the marginal product ________ as the number of workers _________
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Marginal Revenue Product
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The extra revenue the firm gets from hiring an additional unit of a factor of production
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Downward
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The labor demand curve slopes ________ because MPL diminishes and the number of workers rises
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Cross
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To maximize profit, a firm hires workers up to the point where the market wage and the VMPL _____
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Equals
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A competitive, profit-maximizing firm hires workers up to the point where the value of the marginal product of labor ________ the wage
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Labor Demand Curve
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The VMPL is the __________ for a competitive, profit maximizing firm
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Output
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When the ________ price changes, the value of marginal product changes, and the labor demand curve shifts
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Increases
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An increase in the price of a good raises the marginal product of each worker and ________ labor demand from the firm
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Reduces
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A decrease in the price of a good reduces the value of marginal product and _______ demand
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Technological Advancements
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This typically raises the MPL which in turn increases demand for labor and shifts the demand curve right
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MPL
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Technological changes can reduce demand with the invention of a robot that could reduce _______ and therefore demand for labor
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Marginal Product
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The quantity available for one factor of production can affect the ________ of other factors
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Work and leisure
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There is a trade off between
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Less
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Workers respond to the increase in the opportunity cost of leisure by taking ______ of it
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Upward
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The labor supply curve is ______ sloping
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Tastes
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A change in ______ can increase or decrease labor supply (Ex: more women work now then in 1950 which caused an increase in labor supply)
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Opportunities
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The supply of labor in one market depends on ________ available in other markets
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Increases
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When immigrants come to a new country, the supply of labor in the country they immigrate to _______
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Balance
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The wage adjusts to ________ the supply and demand for labor
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Equals
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The wage _______ the value of marginal product of labor
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Equilibrium Wage, VMPL
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Any event that changes the supply and demand for labor must change the ___________ and ________ by the same amount because these must always equal
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Increase
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A price _______ doesn't change MPL, but it does raise VMPL
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Highly, less highly
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Highly productive workers are ______ paid and less productive workers are _______ paid
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More
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Workers today are better off than previous generations because they are _____ productive
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Capital
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The equipment and structures used to produce goods and services
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Capital
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The economy's ________ represents the accumulation of goods produced in the past that are being used in the present to produce new goods and services
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Purchase Price
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The _______ of land or capital is the price a person pays to own that factor of production indefinitely
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Rental Price
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The ______ is the price a person pays to use that factor of production for a limited periods of time
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Wage
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Is the rental price of labor
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Equal
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As long as the firms using the factors of production are competitive and profit maximizing, each factor's rental price must be _____ to VMP for that factor
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Production Process
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Land, labor, and capital each earn the value of their marginal contribution to the ________
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More
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Buyers are willing to pay ______ for a piece of land or capital if it produces a valuable stream of rental income
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Future
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The equilibrium purchase price of a piece of land or capital depends on both the current value of the marginal product and the value of marginal product expected to prevail in the ________
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Avaliable
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The marginal product of any factor of production depends on the quantity of that factor that's _________
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Diminishing Marginal Product
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Because of _______ a factor in abundant supply has a low marginal product and thus a low price, and a factor in scarce supply has a high marginal product and a high price
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Rises
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When the supply of a factor falls, its equilibrium factor price _______
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Factors
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An event that changes the supply of any factor of production can alter the earnings of all the _______
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VMPL
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The change in earnings of any factor can be found by analyzing the impact of the event on the _____ of tat factor
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Rises
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During the plague in 14th century Europe, the reduced population caused the MPL to ______ and wages would rise. Also, with fewer workers available to farm land, n additional unit of land produced less additional output and therefore the marginal product of land fell and reduced rent prices.
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Neoclassical Theory of Distribution
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According to this theory, the amount paid to each factor of production depends on the supply and demand of that factor and the demand, in turn, depends on that particular factor's marginal productivity. In equilibrium, each factor of production earns the value of its marginal contribution to the production of goods and services