[MUSIC] Hi, Professor Navarro here again. And at this point in the course we have finished with both the dynamics of supply and demand. And our analysis of market structure, conduct and performance. Over the next three lectures, we're going to turn to what economists call the factors of production. The land, labor, capital and raw materials businesses need. To produce goods and services. Our major goal is to determine how the price of each of the three major factors of production, land, labor, and capital, are determined in the marketplace. The price of labor, roughly speaking, is the wage limit. The price of capital is related to both the interest rate and the profits earned on capital. As for the price of land, it is the rent the firm must pay for it. Although as we shall see, economists have a much narrower definition of rent than you may be used to. In this lecture, we will start with how rents are set in the market for land. And in the discussion we'll come to learn why an acre of land has so many different prices depending on its location, productivity and other characteristics. [MUSIC] Okay, I know this is micro economics, but I want to start this chapter with just a little macro economics. Here it is. A nation's gross domestic product, or GDP, is the most common measure of its productive output. And one way economists have of measuring the GDP is to simply add up all the income that people receive each year from producing years output using the three major factors of production. Land, labor and capital. Together with raw materials, land, labor, and capital are the major resource inputs, or factors, that businesses need to produce goods and services. And each of these factor inputs has a price. The price of labor, roughly speaking, is the wage rate. The price of capital is related to both the interest rate and the profits earned on capital. And the price of land is the rent the firm must pay for it. Although, as we shall see, economists have a much narrower definition of rent than we are used to. So, using one formula to calculate GDP GDP roughly equals wages earned by workers plus rents earned by property owners plus interest received by lenders plus profits earned by firms. So why am I telling you this? Because from the GDP formula, it should be clear that the distribution of income in our country is determined in large part by the price for which each of the major factors of production can be sold or rented. In your own personal terms, that means factor prices will be a major determinant of your annual income. Put simply, your future income will depend, not just on the wages you earn at your job, but also upon the interest and profits derived from any stocks and bonds, or other capital that you hold. And from the rents from any land that you might own. The fact that your future income will depend on factor pricing is a great reason to study this topic but it's not the only reason. From a broader economic view factor pricing also guides resource allocations. Just as product prices ration finished goods and services to consumers, so to do resources prices allocate scarce resources among industries and firms. An understanding of how resource prices affect resource allocation is particularly significant since, in a dynamic economy, the efficient allocation of resources over time calls for continuing shifts in resources among alternative uses. At the same time factor pricing illustrates the flip side of profit maximization namely cost minimization. Suppose you own your own factory. To maximize profits your firm must produce the profit maximizing output with the least costly combination of factor resources. Given technology, resource prices will play the major role in determining the quantities of land, labor, capital, and entrepreneurial ability, that you will use in your production process. Finally, there are a myriad of ethical questions and public policy issues surrounding the factor resource market. Should the Robin Hood of old have stolen from the rich to give to the poor. And in today's modern society, should the government use tax policy to redistribute income from the upper and middle classes to the poor? By the same token should the government tax the excess profits of corporations. Put a cap or ceiling on the sometimes exorbitant interest rates charged by credit card companies. Or provide workers with a wage floor in the form of a minimum wage. And what about labor unions? Do they actually raise the wages of workers, and, if so, do unions do so at the expense of jobs? We will address all of these issues and more in the next four lectures. In this lecture, we will begin by examining how rents are set in the market for land. Then we will systematically work our way through each of the other factors starting with labor and finishing with the capital market.
