Chapter 19, Problem aWYWL

To determine

How are resources traded in the factor markets and the distribution of factor income.

Concept Introduction:

Factors refer to resources like land, labor, capital and human capital which are used in the production of goods and services meant for final consumption.

Factor income refers to the income received by the factors of production for producing goods and services.

Explanation of Solution

Factors refer to resources like land, labor, capital and human capital which are used in the production of goods and services meant for final consumption. These factors are brought to the factor market where they are traded at a price known as the factor price. Factor prices play an important role in the allocation of these resources. The factors of production determine the supply of factors in the factor market and the producers determine the demand for these factors based on their scale of operation.

Like a simple goods market, the intersection of these supply and demand curves for factors determine their factor price and their equilibrium quantity.

These factor prices are also income received by the factors for producing goods. Factor distribution of income refers to the division of total income generated in the process of production. Thus, factor prices determined by the forces of supply and demand determine the factor distribution of income.