Chapter 18 is all about the factors of production, or mainly, labor and capital. There are 6 key terms to know to understand the section, and those are factors of production, the production function, the marginal product of labor, the diminishing marginal product, the value of the marginal product, and capital.
Factors of production are inputs used to produce goods and services. Examples of factors of production are land, labor, and capital, which includes equipment and structures used to produce goods and services, such as factories. The production function refers to the relationship between the quantity of inputs and quantity of outputs (keeping in mind that labor and land also goes into the production function). The marginal product of labor is the change in output per one unit of labor. For example, the marginal product of labor would be 10 units if the output increased by 10 by adding a worker. The diminishing marginal product relates to the marginal product of labor. It states that marginal product declines as input increases. The value of the marginal product is the marginal product of an input multiplied by the price of the output. Another similar term to ones mentioned above is the marginal revenue product, which references that the firm gets increased revenue from hiring an addition unit of a factor of production. A theory developing around the factors of production is the neoclassical theory of distribution, which say that the amount paid to each factor of production depends on the supply and demand, which is based off of the firm’s marginal productivity.
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