Chapter 18: The Markets For The Factors of Production

Chapter 18 discusses the effect of supply and demand of the labor market. The chapter started by describing what income was and how it was distributed in the markets for the factors of production. The factors of production included labor, land, and capital. Talking specifically about labor, the demand is determined through marginal product and the value of marginal product. In regards to supply of the labor market, it all depends on the worker's opportunity cost. The opportunity cost is battled between the work and leisure. In addition, the slope of this graph is an upward slope because that means that people respond to an increase in the wage being paid by enjoying less leisure time. The equilibrium reached by the supply and demand is according to the marginal cost. In equilibrium, each factor is compensated according to its marginal contribution to the production of goods and services. This way, any changes between supply and demand will always result in equilibrium.