CHAPTER 6:

FACTOR
MARKETS AND
INCOME
DISTRIBUTION
SBAC-1C
PRESENTED BY:
ESCALA, GEOFFREY
JAVIER, MA. LOURDES
MANLUTAC, AIRA
PERUCHO, HANNAH GISELLE
 FACTORS OF PRODUCTION

• Land
• Labor
• Capital
• Entrepreneur
• The suppliers of goods and services are the
business firms and the buyers are the
households.
• However the transaction or exchanges in the
product markets constitute only half of
circular flow of transactions.
• Equally important are the two factor markets
where households are the suppliers of
productive resources to the business firms.
The incomes of the households depends on the
price of their productive resources. Such
incomes determine their ability to buy the
goods and services offered by the business
firms.
• The concepts of demand and supply under
perfect competition- which applies to the
product markets- also applies to the
factors of market.
• Equilibrium point of the demand and supply
determines the market price and the
quantities of productive resources that are
bought and sold.
• The incomes of individuals depends on their
ownership of productive resources and the
prices of such resources.
Other determinants of factors of demand.
– Productivity

Demand for labor - Quantity demanded

for labor has a inverse relationship
with wage rates.
Marginal Product of Labor - is the additional
output produce by the employment of an
additional man hour of labor Marginal Revenue
Product of Labor (MRP) Additional revenue
(income0 obtained by selling the marginal
product of labor Picture Marginal Resource
Cost (MRC) Is the payment of the additional
man hour of labor and other productive
resources like land and capital.
Employment Decision
The rules of employing more man hours of labor
are:

• MRP > MRC = employ more man hours of labor

• MRP < MRC = reduce man-hour of labor
• MRP = MRC = maintain man-hours of labor
 Supply in the Factor Market
• The law of supply governs the behavior of resources
in the factor market. The law of supply governs the
behavior of sellers of productive resources.
• Supply of Labor In the case of labor beyond and
certain point further increase in wage rates
reduces man-hour of labor due to greater desire of
people for leisure. Picture Labor Market Picture
The labor market is composed of demand for labor
and supply for labor. Their interaction results
ultimately to an equilibrium wage. The equilibrium
wage is located at the intersection of the demand
and supply curves.
 “A wage higher than equilibrium wage creates a
labor surplus. A wage lower than the equilibrium
wage creates a labor-shortage.”
 LABOR MARKET
• Labor market is also known as job market.
• It composed of demand for labor and supply
for labor.
• The market demand for labor constitutes all
the demands of all firms for labor.
Whenever wage rises, a firm’s demand for
labor falls.
• Labor market is the place where employers
and workers are interact with each other.
 LABOR MARKET GRAPH

W
A
G
E

MAN-HOUR
• Below the Equilibrium which is T means there is
a labor shortage.
• Equilibrium R is the man-hour and Y is the wage
• Above the Equilibrium which is X means there is
a labor surplus.
When there is labor surplus, wage moves down
towards the equilibrium point. When supply
exceeds demand, the wage of labor fails.

In the case of labor shortage, wage moves up

towards the equilibrium point.

Again, such behavior follow the law of supply

and demand.

D<S means the price of labor goes up.

There is no government intervention. This is
an assumption in a free market economy.
 LABOR MARKET FOR TEACHERS
• Our country has a labor surplus. There
are many teachers in the Philippines.
• Abundant productive resources command a
very low wages, it is the reason why
those teachers in our country the wages
are very low.
• Low wages forced some professionals to
work abroad as maids.
 INCOME DISTRIBUTION

Income distribution is the allocation of

income among the owners of the factors of
the production.
 TYPES OF INCOME DISTRIBUTION
• PERSONAL DISTRIBUTION - is the
allocation of income among persons or
households.
LORENZ CURVE
FUNCTIONAL DISTRIBUTION - is the
allocation of income such as land,
labor, capital and entrepreneur.
CAUSES OF INCOME INEQUALITY

1. Intelligence and talents

2. Education and training
3. Unpleasant and risky
4. Ownership of productive factors
5. Luck and connections
 THEORIES OF INCOME DISTRIBUTION
• The various economic systems have different
concepts and practices of income
distribution. Under the free market economy,
the prices of the factors of production are
determined by demand and supply forces.
For instance, rent which is the price of
using land, has been increasing. The reason
is that the supply of land is fixed while
land has been increasing due to rise in
population and business activities.
 Cont..
• There is nothing wrong with the income of
the owners that determined by the market
forces, but what is wrong or unjust is
the distribution of the factors of
production.

• There is a redistribution of wealth and

income based on social and economic
justice.
 There are several theories of income distribution
based on the following:

• Marginal Productivity
• Needs
• Social Usefulness
• Equality
 Marginal Productivity
It holds that the income of the factor of
production (or factor payment) is equal to
the value of its marginal product.
This simply means that the owners of the
factors of production are paid based on their
contribution to production under a
competitive market condition.
However, in the real world, this does not
exactly happen.
 Needs
It determine the amount of income of
families or individuals. Those who have more
needs receive more income in proportion to
their needs.

 Social Usefulness
It is the basis of income distribution.
Jobs which are more useful to society are
paid higher.
 Equality
It refers to an income distribution in which
all members of society receive an equal amount
of income. This is the idea of communism in an
attempt to erase the gap between the rich and
poor. Such theory is good to others but not to
all.
Those people who are lazy or have a little
qualification are happy under this arrangement,
but those who are highly qualified and
ambitious are discouraged or demoralized.
 PRICING OF RESOURCES
• Refers to payments of the factors of
production. As stated earlier, factor prices
of factors payments are determined by the
law of supply and demand.
However, due to the limitations of the
market forces, the government interferes to
a certain degree, in the pricing of the
productive resources to protect the interest
of the workers who constitute a great
majority of the productive resources.
• The unjust pricing of some productive factors
results in a higher costs of production and
this means are higher prices of goods and
services

• Price is equivalent to cost of production.

There is no pure profit. There is only normal
profit for the entrepreneur. In the case of
just wage, it means a fair income for labor.

• The role of the government is not big as that

in the socialist countries. The government
only supports and regulates the market forces.
 WAGES - THE PRICE OF LABOR
• Wages is the most important price of the
productive resources. To most people,
wage or salary is the only source of
income.Every time prices of goods and
services increase, real wages decrease.
Real wages refer to the number of goods and
services that a worker can by with his money-
his nominal income. A real wage is the
purchasing power of the worker.
The determinants of wage rates are:

• Supply and Demand

• Minimum Wage
• Labor Unions
 Supply and Demand
Wages rate, like goods are determined by
the free interaction between supply and
demand for labor.
If demand for workers is greater than
supply of workers, the wage rates increase.
On the other hand, if supply of workers is
greater than demand for workers, then wage
rates decrease.
 Minimum Wage
The government imposes minimum wage
rates various workers like those in the
industrial and agricultural sectors.
The objective of such wage
determination is the desire of the
government to protect the interest of
the low-income workers in relation to
the increasing cost of living.
 Labor Unions
More active labor unions are likely
to protect and promote the legitimate
interests of their members against the
exploitations of their employers.
Through persistent collective
bargaining, labor unions can realize
fair demands from their employers,
especially under a good government.
 ECONOMIC RENT
To most people the
word "rent" refers to
the payment of a
room, apartment,
building or machine.
However, in economics

Rent
rent is the payment
for the use of land
and other natural
resources which are
completely fixed in
total supply. O
Land
 LAND RENT IS AN UNEARNED
INCOME
• David Ricardo author of the classical
theory of comparative advantage and
Henry George author of the Progress and
Poverty claimed that rent was unearned
income.
• Adam Smith declared that rent was a
monopoly price.
• Ricardo states that higher prices of
crops were due to rent which
increased, as a nation became more
fully populated and the best land had
been exhausted.

• Henry George concluded that land rent

is the root cause of poverty.
 SINGLE TAX – KEY TO
PROGRESS
• Henry George proposed that the increase in
rent or value of land should be taken by
the government in the form of tax.
• He said that if his proposal would be
implemented, it would be full employment,
eradication of slums, and the steady rise
in wages due to the rapid increase in
labor demand.
• George theory of single tax became popular
but it was not successful.
 INTEREST

• Interest rate is the payment for using

the money of other individuals.
• The imposition of unreasonably high
interest rate on loans had been condemned
by society, then and now called usury.
Those who charge extremely high interest
rates are known as loan sharks or
usurers.
• Money is not a productive factor. Its
basic function is only a medium of
exchange but in the modern economy we
use money for production.

• Interest rates vary.

 PROFITS
• Economic or Pure Profits after deducting
the cost of production. Such cost include
explicit cost (actual expenditure of a
firm) and implicit cost (payments to
productive resources owned and self-
employed by a firm.)
• In a business profit like in sari-sari
store only explicit cost is computed. But
in economics, implicit cost is a part of
the total cost of production.
 SUMMARY
1. The productive resources are land, labor,
capital and entrepreneur. In a perfect
competition or free-market economy, the
prices of these inputs are established by the
forces of demand and supply.
2. The demand for the productive resources
depends on the following: demand for goods
and services, productivity of the productive
resources, and the prices of the factor
substitutes and complementary resources.
3. The demand for labor is primarily based on
the law of demand. At higher wage rates, the
quantity demanded for labor falls. Firms are
more willing to employ more workers at lower
wage rates.

4. The rules for employing more man-hours of

labor are:
a)MRP > MRC, employ more man-hours of labor.
b)MRP< MRC, reduce man-hours of labor.
c)MRP= MRC, maintain man-hours of labor.
5. The law of supply governs the behavior of
sellers of productive resources. They are more
willing to offer their resources at higher
prices. However, in the case of labor, beyond a
certain point, further increase in wage rates
reduces man-hours of labor due to greater desire
of people for leisure. In the case of land, it is
a fixed factor. An increase in its prices does
not increase in its prices does not increase the
areas of land for sale.

6.The labor market is composed of demand for

labor and supply of labor. Their interaction
results ultimately to an equilibrium wage.
The equilibrium wage is located at the
intersection point of demand and supply
curves. A wage higher than the equilibrium
wage creates a labor surplus. A wage lower
than the equilibrium wage creates a labor
shortage.

7. There is labor surplus in the Philippines.

This means that many people are jobless. Even
professional, like teachers, are too many,
relative to the demand for their services. As
a result, by operation of the law of supply
and demand, their wages are very low.
8. The demand for labor is not competitive.
There are only very few buyers of labor. Thus,
they can exploit which they do their workers in
terms of starvation wages and poor working
conditions. Not a few firms hire workers as
“trainees” or as “casuals”. This is pure
exploitation of labor.

9. Types of income distribution are personal and

functional. The Lorenz Curve illustrates the
personal distribution.

10. Causes of income inequality are intelligence

and talents, education and training, unpleasant
 and risky jobs, ownership of the productive
factors, and luck and connections.

11. The theories of income distribution are

marginal productivity, needs, social usefulness
and equality.

12. The determinants of wage rates are supply

and demand, government laws and labor unions.

13. Henry George claimed that economic rent is

the cause of poverty. He proposed that rent
should be taken by the government in the form
of tax. Then spend this for the progress of
society.