Factor Markets
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The demand
for a factor is derived from the demand for what the factor produces.
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Marginal revenue product (MRP)
- the
change in total revenue from employing an additional factor unit
- MRP = MR
x MPP
- The MRP curve will always
eventually
slope downward due to the law of diminishing marginal returns
- The
demand curve for a factor is that factor’s
MRP curve.
- The MRP curve tells the
employer how many workers to employ at different wage rates
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Marginal factor cost (MFC)
- the
additional cost
from employing an additional factor unit
- For a
perfectly competitive employer, the MFC of
each worker is the same as the wage rate
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| To maximize profits, a producer employs
additional factor units up to the quantity where MRP = MFC |
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Determinants of factor
demand:
- Product
price
- Factor
Productivity
- Prices
of reelated goods
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Value of the marginal
product (VMP)
- the
value to society of the output produced by the marginal factor.
- VMP
equals the price of the product times the
MPP of the factor.
- VMP = P
x MPP
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| To minimize costs,
producers will attempt to
combine factors so that the ratio of MPP to factor price will be the
same for
all factors |
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The elasticity of demand
for labor
measures the responsiveness of employers to a change in the wage rate. There are three determinants of the
elasticity of demand for labor:
- The
number of substitute factors
- The
price elasticity of demand for the product
that the labor produces
- The
percentage that labor costs make up of total
cost
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| The labor supply curve in
a particular labor
market will be upward sloping |
Determinants of labor
supply:
- Wage
rates in alternative labor markets
- Nonmoney
aspects of a job
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Wage rates in different
labor
markets differ due to:
- Differences
in workers’ MRP
- Differences
in nonmoney aspects of jobs
- Rareness
of skills required
- Training
costs
- Relocation
costs
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