# Factors of Production

Competitive Labor Markets Factor Markets Part II (Chapter 18) All of Microeconomics in one slide: You Buy Something when: Firms produce another unit when: MB MC MR MC Firms purchase another input when: MRP MFC Product Market & Factor Markets MR = MC MRP = MFC Price Wage

Rate MC ATC MFC ------------- ----------- 0 Market wage Demand MRP Marginal Revenue Product (demand curve for labor) MR Quantity Market for OUTPUTS 0

Profit-maximizing quantity Market for INPUTS Quantity of Workers Demand & Supply of Factors 1) MRP is the demand curve for input Wage Rate Supply curve MP input X price output MFC 1) MFC is the supply curve for inputs Market wage Cost of input MRP

Marginal Revenue Product (demand curve for labor) 0 Profit-maximizing quantity Most firms are competitive in the factor market (input market) So they are wage takers in the labor market. - This means a firm has a horizontal supply curve (perfectly elastic) - i.e. price is fixed Quantity of Workers Derived Demand for Inputs Product Market Factor Market T-Shirt Market Price S

------------- \$15 -------------- Q Demand For product Labor Market E1 D D2 Wages/hr MFC \$20 MRP1 MRP2 Qty Qty

Price of Product MRP MRP = MPL * P More Workers Hired Wage rate Unchanged! Shifts in Labor Demand Demand Curve shifts right when: Demand for Product Productivity Technology, working conditions, etc... Wage Rate Market wage Price of other resources: Price of complementary resource Price of substitute resource MRP2

MRP Marginal Revenue Product (demand curve for labor) 0 Profit-maximizing quantity Quantity of Workers It Depends Two different effects when the price of substitute falls: 1) Substitution Effect- you hire less workers 2) Output Effect- MC falls, so output increases => you hire more workers Competitive Labor Market Worksheet Worksheet Review Product Market Factor Market T-Shirt Market Price Labor Market S

------------- \$10 -------------- Q E1 D Qty D2 Wages/day MFC \$200 MRP1 MRP2 Qty Worksheet Review Low Skilled Workers Price

S ------------- \$10 -------------- Q E1 One Firm Wages/day MFC \$10 D Qty MRP1 Qty

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