1. Winston Churchill High School
Factor Markets
David Mayer
AP Microeconomics
Winston Churchill High School
San Antonio, Texas

2. Factor Demand The factors of production are
Land
Labor
Capital
Entrepreneurship
Producers demand the factors of production in order to supply goods and services in the product market
In order to understand factor demand we will focus on the demand for labor.

3. The Perfectly Competitive Firm’s Market for Labor
Marginal Revenue Product (MRP)
MRP = ∆ Total Revenue / ∆ Input
MRP = MR*MPL=P * MPL
MRP = Demand for Labor
Marginal Resource Cost (MRC)
MRC = ∆ Total Resource Cost / ∆ Input
MRC = Wage
MRC = Supply of Labor to a competitive firm

4. The Perfectly Competitive Firm’s Market for Labor
Price of Labor
MRC = Wage = Supply of Labor w
MRPL= Demand for Labor Q
Quantity of Labor

5. Determinants of Resource Demand
Product Demand (creates Derived Demand)
Productivity of Labor
Access to physical capital
Increased technology
Improvements in human capital
Price of other resources
Substitute Resource
Substitution effect
Output effect
Complementary resources

6. Change in Resource Demand
Price of Labor → w
MRC
MRPL
MRPL1 Q Q1
Quantity of Labor
Assume the price (P) of a competitive firm’s product increases. Because MRPL = P * MPL .: MRPL will increase… P↑ .: MRPL↑ .: Quantity of labor employed ↑

7. Least-Cost Hiring Rule
Given a budget constraint, what is the least costly combination of labor and capital that will generate a maximum level of output ?
MPL/PL = MPK/PK = MPL/MPK = PL/PK
If MPL/PL > MPK/PK , then the firm will hire more labor and employ less capital until MPL/PL = MPK/PK
If MPL/PL < MPK/PK , then the firm will employ more capital and employ less labor until MPL/PL = MPK/PK

8. Labor Market Price of Labor Supply of Labor w Demand for Labor Q
Quantity of Labor

9. Imperfect Competition in the Product Market (Monopoly)
For a monopolist in the product market MR<P, so in the factor market MRPM < MRPC
Price of Labor w
MRC
MRPC
MRPM QM QC
Quantity of Labor

10. Imperfect Competition in the Factor Market (Monopsony)
MRC
Unlike a monopoly, which is the sole producer of a good or service, a monopsonist is the sole consumer of a good or service. In the factor market this leads to a condition where the MRC > Wage.
Price of Labor
Supply of Labor wc wm
MRP Qm Qc
Quantity of Labor