Factors of production include labor, capital, land, and entrepreneurship. The marginal revenue product of an input is the additional revenue generated by employing one more unit of it. The labor demand curve is downward-sloping, reflecting that firms hire more workers only when wages fall, while labor supply represents the amount of labor workers are willing to provide at various wages. Human capital refers to the skills, knowledge, and experience that workers accumulate, and human capital theory, developed by Becker, treats education and training as investments that raise future productivity and wages, generating a wage premium for those with more education.
The labor market is shaped by the consumption-leisure tradeoff, as workers balance income against leisure. A higher wage creates two competing effects: the substitution effect makes working more attractive relative to leisure, while the income effect allows workers to afford more leisure. The backward-bending labor supply curve emerges when, at high wages, the income effect dominates and additional income reduces hours worked. A minimum wage set above equilibrium can cause unemployment for low-skill workers, illustrating how price controls apply in factor markets as well as goods markets. Unemployment in microeconomics refers to workers unable to find jobs at the prevailing wage, and it can be frictional, from job search transitions; structural, from skill mismatches; cyclical, from downturns in the business cycle; or related to the natural rate, the level consistent with stable inflation. The Phillips curve describes a relationship between unemployment and inflation, and stagflation refers to the simultaneous occurrence of high inflation and high unemployment.
A labor monopsony is a market with a single buyer, which results in lower wages and employment than a competitive market. Wage discrimination occurs when equal work is rewarded unequally by characteristics such as race or gender, contributing to the gender pay gap, while efficiency wage theory suggests that paying above-market wages increases productivity and reduces turnover. Capital refers to goods used to produce other goods, such as machines and buildings. The interest rate is the price of borrowing money, present value is the current worth of a future sum discounted by that rate, and the time value of money captures the idea that a dollar today is worth more than a dollar tomorrow due to interest and risk. A risk premium is the extra return required to bear additional risk. Intertemporal choice describes decisions involving outcomes across different times, and the marginal propensity to consume captures the fraction of additional income devoted to consumption, with the savings rate capturing what is held back.