Glossary
Cost Minimization
The process by which firms choose the combination of inputs (factors of production) that produces a given level of output at the lowest possible cost, typically by equating the marginal product per dollar spent for all resources.
Example:
A farmer might adjust the mix of fertilizer (capital) and manual labor (labor) to achieve cost minimization for a specific crop yield. [2]
Derived Demand
The demand for a factor of production that is dependent on the demand for the final good or service it helps to produce. [1, 16]
Example:
An increase in the demand for electric vehicles leads to a derived demand for lithium, a key component in EV batteries. [25]
Factor Markets
Markets where firms demand and purchase factors of production (resources) from households. It's the 'input' market in the circular flow model. [7]
Example:
A construction company hiring carpenters is operating in the factor market for labor. [7]
Factors of Production
The resources or inputs used to produce goods and services. These typically include land, labor, capital, and entrepreneurship. [7]
Example:
A bakery uses flour (land/raw material), bakers (labor), ovens (capital), and the owner's business acumen (factors of production) to make bread. [17]
Intervention by Government (Determinant of Factor Supply)
A factor that shifts the labor supply curve; government policies like occupational licensing, minimum wage laws, or immigration policies can affect the supply of labor. [23]
Example:
New government regulations requiring extensive licensing for electricians (an intervention by government) could reduce the supply of qualified electricians. [23]
MRP = MRC Rule
The profit-maximizing rule for firms hiring resources, stating that a firm should continue to hire additional units of a resource as long as the marginal revenue product (MRP) is greater than or equal to the marginal resource cost (MRC). [4]
Example:
A factory will hire additional assembly line workers until the revenue generated by the last worker's output (MRP) equals the cost of hiring that worker (MRC). [4]
Marginal Resource Cost (MRC)
The additional cost incurred by a firm when it hires one more unit of a factor of production. [2, 12]
Example:
If hiring one more software engineer costs the company an additional 10,000 is the MRC of that engineer. [20]
Marginal Revenue Product (MRP)
The additional revenue a firm earns from hiring one more unit of a factor of production (e.g., one more worker). It is calculated as Marginal Product (MP) multiplied by the price of the output (P) in a perfectly competitive product market. [1, 18]
Example:
If an extra barista can make 20 more coffees, and each coffee sells for 60. [28]
Monopsony
A market structure in which there is only one buyer of a particular factor of production, giving that buyer significant power to influence the market price (wage). [8, 15]
Example:
A single coal mine that is the only employer in a remote town represents a monopsony in the local labor market. [15]
Monopsony Graph
A graphical representation of a monopsonistic labor market, showing an upward-sloping labor supply curve, a higher Marginal Resource Cost (MRC) curve above the supply curve, and the firm hiring where MRP = MRC but paying a lower wage found on the supply curve. [3, 6, 8]
Example:
When analyzing the impact of a minimum wage on a single large employer, students would draw a monopsony graph to illustrate the resulting changes in employment and wages. [6]
Number of Qualified Workers (Determinant of Factor Supply)
A factor that shifts the labor supply curve; an increase in the pool of qualified individuals for a job will increase the labor supply.
Example:
If more students graduate with nursing degrees, the number of qualified workers in the nursing profession will increase, shifting the supply of nurses to the right. [23]
Perfectly Competitive Labor Market
A market structure characterized by many firms competing for workers, many workers with identical skills, and no single firm or worker having the power to influence the market wage. [13, 19]
Example:
The market for entry-level fast-food workers in a large city with many restaurants is often considered a perfectly competitive labor market. [19]
Personal Values/Leisure (Determinant of Factor Supply)
A factor that shifts the labor supply curve; if individuals value leisure more, they may supply less labor at any given wage.
Example:
If a society places a higher value on work-life balance and leisure time, the personal values/leisure of workers might lead to a decrease in the overall labor supply. [23]
Price of Other Resources (Determinant of Factor Demand)
A factor that shifts the demand curve for a resource; changes in the price of substitute or complementary resources can affect demand for a given resource.
Example:
If the cost of automated factory robots decreases significantly, a car manufacturer might reduce its demand for human assembly line workers (a substitute resource), illustrating the impact of the price of other resources.
Product Demand (Determinant of Factor Demand)
A factor that shifts the demand curve for a resource; an increase in the demand for the final product will increase the demand for the resources used to produce it.
Example:
A sudden surge in popularity for a new video game console will increase the product demand, leading to a higher demand for the microchips and labor needed to build it. [1]
Product Market
A market where households buy goods and services from firms. This is the 'output' market in the circular flow model.
Example:
When you go to the grocery store to buy milk and bread, you are participating in the product market.
Resource Productivity (Determinant of Factor Demand)
A factor that shifts the demand curve for a resource; if a resource becomes more productive, its demand increases.
Example:
New software that allows graphic designers to complete projects twice as fast increases their resource productivity, leading to higher demand for designers. [1]
Wage-Making (power)
The ability of a monopsonist to set the wage rate for labor, as they are the sole buyer and face the entire upward-sloping market supply curve for labor. [15]
Example:
Because it's the only major employer in the region, a large tech company might have wage-making power, allowing it to offer lower salaries than in a competitive market. [15]
Wage-Takers
In a perfectly competitive labor market, individual firms and workers are *wage-takers*, meaning they must accept the prevailing market wage rate determined by overall supply and demand. [13, 19]
Example:
A small coffee shop in a bustling downtown area is a wage-taker because it must pay its baristas the going market rate to attract and retain staff. [19]