1. Factor Markets
Chapter 18

2. Markets for Factors of Production
Factors of production are inputs used to produce goods & services
Demand for a factor of production is a derived demand:
A firm’s demand for a factor of production is derived from demand for their own product

3. Labor markets, like other markets, are governed by the forces of supply & demand
(a) The Market for Apples
(b) The Market for Apple Pickers
Price of
Wage of
Apples
Apple
Pickers
Supply
Demand
Supply
Demand P Q L W
Quantity of
Quantity of
Apples
Apple Pickers
The demand for apple pickers is derived from the market demand for apples
Copyright©2003 Southwestern/Thomson Learning

4. Marginal Product of Labor
Production Function- illustrates the relationship between quantity of inputs & quantity of output
Marginal Product of Labor (MPL)- the increase in output from an additional unit of labor
MPL = Q/L or
MPL = (Q2 – Q1)/(L2 – L1)

5. Diminishing Marginal Product of Labor:
As more workers
are added
Marginal Product
Labor Declines
MPL = Q/L
Diminishing Marginal Product of Labor:
Each additional worker contributes less to production than the prior one

6. The Production Function
Diminishing Marginal Product makes the Production Function becomes “flatter”
Quantity
of Apples
Production
function
300
280
240
180
100 1 2 3 4 5
Quantity of
Apple Pickers

7. Marginal Revenue Product (MRP)
MRP = The marginal product of input multiplied by the market price of output (measured in dollars)
MRPL = MPL  P
MRP = Δ in Total Revenue / Δ in Resource Qty
Qty Total Marginal Price MRP
Labor Product Product
___ ___ ___
___ ___ ___
___ ___ ___
___ ___ ___
Price for a competitive firm equals MR & remains constant
Assume Price = $0.50

8. To Maximize Profit
A competitive firm hires workers up to the point where MRP =Wage
The MRP curve is the labor demand curve for a competitive, profit-maximizing firm.

9. MRP & Maximizing Profit
Value
When a competitive firm hires labor up to the point where MRP = Wage,
it also produces up to the point at which the P = MC
of the
Marginal
Product
Marginal Revenue Product
(demand curve for labor)
Market
wage
Profit-maximizing quantity
Quantity of
Apple Pickers

10. Worksheet Lesson 2, Activity 44 New Terms: Marginal Product of Labor
Marginal Revenue Product