Questions for Review with Answers
Chapter 16. Market Theory II. Factor Markets
I. Basics
Chapter 16 – Question 1
Define human capital.
* Human capital stands for previous investment in humans such as education, training and health care which now manifests itself in productive work.
Chapter 16 – Question 2
Factor market theory is the neo-classical theory of income distribution. Can you explain that?
* Incomes are viewed as returns to factor ownership. Factors are sold on factor markets.
Chapter 16 – Question 3
Are money, knowledge and technology factors of production?
* Money definitely not, unless it is invested in a production process. Knowledge and technology are debatable. Knowledge is a property of labour. Technology is invented by labour and embodied in capital.
II. Factor Markets
Chapter 16 – Question 4
What kinds of incomes are there?
* Incomes include returns to capital, rent and wages - these are the returns to the three factors of production. Property incomes include returns to capital and rent plus interest on bank deposits or dividends on shares. Moreover, there are transfer payments; these are gifts from the government for which the recipient gives nothing in exchange.
Chapter 16 – Question 5
How do governments in capitalist economies intervene in the distribution of incomes made by factor markets?
* They can influence the inequality of income distribution through taxation. They give welfare benefits to people who have no incomes.
III. Factor Prices
Chapter 16 – Question 6
How do economists explain how much of a factor is demanded?
* With the help of marginal analysis. Firms hire additional factors until the last unit contributes to company revenues what it costs.
Chapter 16 – Question 7
How do economists explain how much a factor costs?
* With the help of supply and demand.
Chapter 16 – Question 8
Demand for factors is derived demand. What does that mean?
* It means that demand for factors depends on demand for the commodities that the factors produce.
Chapter 16 – Question 9
What determines supply of factors?
* It is determined by opportunity costs. Workers face a trade-off between work and leisure. Capital owners face a trade-off between investing in their business or investing elsewhere.
IV. Present Value. The Theory of Investment in Capital and Land
Chapter 16 – Question 10
Please define present value.
* Present value equals the amount of money that you must invest today in securities to receive the same future payoffs that you would receive from capital investment.
Chapter 16 – Question 11
Do you remember the formula to calculate present value of capital? (You need N for net receipts and i for interest and you need indices for the years.)
* Present Value = N1 + N2___ + ....
(1 + i) (1+i) 2
Chapter 16 – Question 12
Is present value low or high when interest and the number of years are high?
* The higher interest rates and the number of years are, the lower present value is. Present value is negatively related to interest rates and the number of investment years. This is because both of them are in the denominator and make the value of the fraction smaller.
V. Wage Theory
Chapter 16 – Question 13
Why do many economists argue that unemployment is voluntary?
* They say that the unemployed prefer leisure to working for the market wage.
Chapter 16 – Question 14
Please explain why the demand curve for labour and the curve illustrating the value of its marginal product are identical.
* They are identical because firms will hire labour up to the wage level that equals the value of its marginal product. According to the law of diminishing returns, both curves slope downwards. The more workers you have hired, the lower is the marginal product of additional workers.
Chapter 16 – Question 15
What are efficiency wages?
* They are above-market-equilibrium wages. They are intended to increase productivity and loyalty.
VI. An Excursus on Ricardo's Iron Law of Wages
Chapter 16 – Question 16
What did the iron law of wages postulate?
* It postulated that wages must allow workers to subsist and "perpetuate their race, without either increase or diminution."
VII. An Excursus on the Division of Labour and the Treatment of Labour
Chapter 16 – Question 17
Explain why Fordism and Taylorism were the logical continuation of the introduction of the factory system.
* The factory system prevented movements of workers from one place to another. Fordism prescribed the speed of the necessary movements still involved in work. Taylorism reduced the number of these movements.
Chapter 16 – Question 18
What is the difference between mechanisation and automation?
* Automation is mechanisation plus sensors, which enable machines to control and adjust themselves.
Chapter 16 – Question 19
What is the Hawthorne effect?
* The Hawthorne effect, detected by Elton Mayo and named after an American electrical plant, revealed that productivity rises significantly, when workers are given the impression of being important. Surprisingly, the effect also arose when this impression was only pretended.
Chapter 16 – Question 20
What is Theory Y?
* Theory Y, advanced by Douglas McGregor, revealed that workers are highly motivated and should be given a say in the production process.
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