Presentation on theme: "AP Economics December 8, 2014 1.Review Unit 3 Exam: Theory of the Firm 2.Begin Unit 4: Factor Markets 3.Unit 4 Exam NEW DATE: Monday, December 22 and Tuesday,"— Presentation transcript:
AP Economics December 8, 2014 1.Review Unit 3 Exam: Theory of the Firm 2.Begin Unit 4: Factor Markets 3.Unit 4 Exam NEW DATE: Monday, December 22 and Tuesday, December 23.
Factor/Resource Market: Firm is a Seller and a Buyer
The Demand for Resources Factor of production is something (an input) that is used to produce output. Examples: buildings, machinery, land, labor, raw materials Derived Demand: The demand for an input is derived from the demand for the output that the input helps produce.
MRP & MRC Marginal Revenue Product (MRP): change in Total Revenue that results from the employment of an additional worker. MRP = TR / L Marginal Resource Cost (MRC): change in Total Cost that results from employment of an additional worker. MRC = TC / L A firm maximizes its total profit by using: MRP=MRC Rule
MRC in a Perfectly Competitive Labor Market Each time a firm hires another worker, its cost increases by the price of the labor (P L ) For a firm in a perfectly competitive labor market, MRC = P L (MRC=Wage) (If a firm is not in a perfectly competitive labor market, this is not true.)
The Supply Curve of Labor to a Firm that is a Perfect Competitor in the Labor Market (Firm is a Wage-Taker) Price of Labor Labor PLPL S
AP Economics December 9, 2014 1.Continue Lesson 4-1: MRP as Resource Demand 2.HW: Activity 4-1 3.Return Work
0123456701234567 0 7 13 18 22 25 27 28 76543217654321 $2.80 2.60 2.40 2.20 2.00 1.87 1.75 1.65 $ 0.00 18.20 31.20 39.60 44.00 46.25 47.25 46.20 $18.20 13.00 8.40 4.40 2.25 1.00 -1.05 ] ] ] ] ] ] ] ] ] ] ] ] ] ] 1234567 0 -2 2 4 6 8 10 12 14 16 $18 Resource Wage (Wage Rate) Quantity of Resource Demanded D=MRP (Pure Competition) Imperfectly Competitive Firm’s Demand for A Resource D=MRP (Imperfect Competition) MRP as Resource Demand Imperfectly Competitive (1) Units of Resource (2) Total Product (Output) (3) Marginal Product (MP) (4) Product Price (5) Total Revenue, (2) X (4) (6) Marginal Revenue Product (MRP) LO1 12-9 Downward sloping at steeper rate due to (1)Diminishing Marginal Productivity (2)Product price drop
AP Economics December 10, 2014 1.Review Activity 4-1 2.Lesson 4-2: Optimal Combination of Resources 3.HW: Activities 4-2, 4-3, 4-4
Lesson 4-2 The Optimal Combination of Resources In our Yo-Yo activity, we assumed the firm was operating in the Short Run with fixed capital and labor as its variable resource. Long Run: Firm can change its capital (K) and it labor (L) Q: What combination of L & K should the firm employ? We can Minimize Cost or Maximize Profit…
If a firm wants to produce the most output on a given budget…or…if it wants to produce a given level of output at lowest cost, it uses… The Least Cost Combination Marginal Product Of Labor (MP L ) Price of Labor (P L ) (MRC L ) Marginal Product Of Capital (MP K ) Price of Capital (P K ) (MRC K ) = LO3 12-12
Least Cost Rule is necessary but not efficient… Profit Maximizing Rule MRP L P L (MRC L ) MRP K P K (MRC K ) = = 1 LO3 12-13
CapitalMP of CapitalLaborMP of Labor 0--- 0 110128 29230 38324 47420 56516 65612 7478 8384 Suppose a firm's marginal product of capital and marginal product of labor schedules are as shown in the table below. The firm hires both capital and labor competitively for $4 and $8, respectively. Its output is sold in a competitive market for $.50 per unit. 1.Suppose the firm is currently using 4 units of capital and 4 units of labor. Is the corresponding output being produced at least cost? How do you know? 2.What combination of labor and capital should the firm use to maximize its profit?