Specific Factors and Income Distribution
3 important questions on Specific Factors and Income Distribution
Why does diminishing returns of labor occur and how is this shown in the production function?
For every extra input of labor, the marginal product diminishes. This is because each worker has less capital to use and the workfloor can become overcrowded, resulting in less productivity of each additional worker.
In the production function this is shown as a decrease in the steepness of the curve (curve becomes flatter).
What does MPLc x Pc tell us?
It tells us not only the value of labor's marginal product of clothes, the curve also reflects the demand for labor in cloth. The point where it's equal to the wage (w), shows us how much employees a firm will hire.
What is a budget constraint?
We're talking of an economy who's importing and exporting goods.
Since the value of consumption must be equal to the value of production, the amount the economy can afford to import is limited, or constrained, by the amount it exports. This is known as a budget constraint.
Since the value of consumption must be equal to the value of production, the amount the economy can afford to import is limited, or constrained, by the amount it exports. This is known as a budget constraint.
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