Worth: Mankiw Ecol CHAPTER 3 National Income: Where It Comes From and Where It Goes 47 Factor price How a Factor of production is to any factor of production supply mand for that factors services Because we have assumed that supply is fixed, the supply curve is vertical. The demand curve downward sloping. The factor price Quantity of factor much as it wants without causing the price of the good to fall, or it can stop sell ing altogether without causing the price of the good to rise. Similarly, our firm cannot influence the wages of the workers it employs because many other local firms also employ workers. The firm has no reason to pay more than the market wage, and if it tried to pay less, its workers would take jobs elsewhere. Therefore, the competitive firm takes the prices of its output and its inputs as giver To make its product, the firm needs two factors of production, capital and labor. As we did for the aggregate economy, we represent the firms production technology by the production function =F(K, L) where Y is the number of units produced (the firms output), K the number of machines used(the amount of capital), and L the number of hours worked by the firms employees(the amount of labor). The firm produces more output if it has more machines or if its employees work more hours The firm sells its output at a price P, hires workers at a wage w, and rents cap ital at a rate R. Notice that when we speak of firms renting capital, we are assum- ing that households own the economy's stock of capital. In this analysis, households rent out their capital, just as they sell their labor. The firm obtains both factors of production from the households that own them. I The goal of the firm is to maximize profit. Profit is revenue minus costs--it is what the owners of the firm keep after paying for the costs of production. Rev- enue equals Px Y, the selling price of the good P multiplied by the amount of I This is a simplification In the real world, the ownership of capital is indirect because firms own apital and households own the firms. That is, real firms have two functions: owning capital and producing output. To help us understand how the factors of production are compensated, however, we assume that firms only produce output and that households own capital directly. User JOENA: Job EFF01419: 6264_ch03: Pg 47: 24983#/eps at 1009 Il wed,Feb13,20028:564MUser JOEWA:Job EFF01419:6264_ch03:Pg 47:24983#/eps at 100% *24983* Wed, Feb 13, 2002 8:56 AM much as it wants without causing the price of the good to fall, or it can stop sell￾ing altogether without causing the price of the good to rise. Similarly, our firm cannot influence the wages of the workers it employs because many other local firms also employ workers.The firm has no reason to pay more than the market wage, and if it tried to pay less, its workers would take jobs elsewhere.Therefore, the competitive firm takes the prices of its output and its inputs as given. To make its product, the firm needs two factors of production, capital and labor. As we did for the aggregate economy, we represent the firm’s production technology by the production function Y = F(K, L), where Y is the number of units produced (the firm’s output), K the number of machines used (the amount of capital), and L the number of hours worked by the firm’s employees (the amount of labor).The firm produces more output if it has more machines or if its employees work more hours. The firm sells its output at a price P, hires workers at a wage W, and rents cap￾ital at a rate R. Notice that when we speak of firms renting capital, we are assum￾ing that households own the economy’s stock of capital. In this analysis, households rent out their capital, just as they sell their labor. The firm obtains both factors of production from the households that own them.1 The goal of the firm is to maximize profit. Profit is revenue minus costs—it is what the owners of the firm keep after paying for the costs of production. Rev￾enue equals P × Y, the selling price of the good P multiplied by the amount of CHAPTER 3 National Income: Where It Comes From and Where It Goes | 47 figure 3-2 Equilibrium factor price Factor supply Factor demand Quantity of factor Factor price How a Factor of Production Is Compensated The price paid to any factor of production depends on the supply and de￾mand for that factor’s services. Because we have assumed that supply is fixed, the supply curve is vertical. The demand curve is downward sloping. The inter￾section of supply and demand determines the equilibrium factor price. 1This is a simplification. In the real world, the ownership of capital is indirect because firms own capital and households own the firms.That is, real firms have two functions: owning capital and producing output.To help us understand how the factors of production are compensated, however, we assume that firms only produce output and that households own capital directly