1. Input Demand: The Labor and Land Markets

2. Firm Choices in Input Markets

3. Demand for Inputs: A Derived Demand Derived demand is demand for resources (inputs) that is dependent on the demand for the outputs those resources can be used to produce.Derived demand is demand for resources (inputs) that is dependent on the demand for the outputs those resources can be used to produce. Inputs are demanded by a firm if, and only if, households demand the good or service produced by that firm.Inputs are demanded by a firm if, and only if, households demand the good or service produced by that firm.

4. Diminishing Returns Marginal product of labor (MP L ) is the additional output produced by one additional unit of labor.Marginal product of labor (MP L ) is the additional output produced by one additional unit of labor. The marginal revenue product (MRP) of a variable input is the additional revenue a firm earns by employing one additional unit of input, ceteris paribus.The marginal revenue product (MRP) of a variable input is the additional revenue a firm earns by employing one additional unit of input, ceteris paribus. MRP L =P X MP L =VMP LMRP L =P X MP L =VMP L

5. Marginal Revenue Product Per Hour of Labor When output price is constant, the behavior of MRP L depends only on the behavior of MP L.When output price is constant, the behavior of MRP L depends only on the behavior of MP L. Under diminishing returns, both MP L and MRP L eventually decline.Under diminishing returns, both MP L and MRP L eventually decline. MRP L = P X  MP L

6. A Firm Using One Variable Factor of Production: Labor A competitive firm using only one variable factor of production will use that factor as long as its marginal revenue product exceeds its unit cost.A competitive firm using only one variable factor of production will use that factor as long as its marginal revenue product exceeds its unit cost. If the firm uses only labor, then it will hire labor as long as MRP L is greater than the going wage, W*.If the firm uses only labor, then it will hire labor as long as MRP L is greater than the going wage, W*.

7. Marginal Revenue Product and Factor Demand for a Firm Using One Variable Input (Labor) The hypothetical firm will demand 210 units of labor.The hypothetical firm will demand 210 units of labor. W* =MRP L = 10

8. Short-Run Demand Curve for a Factor of Production When a firm uses only one variable factor of production, that factor’s marginal revenue product curve is the firm’s demand curve for that factor in the short run.When a firm uses only one variable factor of production, that factor’s marginal revenue product curve is the firm’s demand curve for that factor in the short run.

9. The Two Profit-Maximizing Conditions (Duality) The two profit-maximizing conditions are simply two views of the same choice process.The two profit-maximizing conditions are simply two views of the same choice process.

10. The Trade-Off Facing Firms

11. A Firm Employing Two Variable Factors of Production When an expanding firm adds to its stock of capital, it raises the productivity of its labor, and vice versa. Each factor complements the other.When an expanding firm adds to its stock of capital, it raises the productivity of its labor, and vice versa. Each factor complements the other.

12. Two effects occur when the (relative) price of an input changes:Two effects occur when the (relative) price of an input changes: Factor substitution effect Factor substitution effect: The tendency of firms to substitute away from a factor whose price has risen and toward a factor whose price has fallen. effect of a factor price increase (decrease) Output effect of a factor price increase (decrease): When a firm decreases (increases) its output in response to a factor price increase (decrease), this decreases (increases) its demand for all factors.

13. Land Markets Unlike labor and capital, the total supply of land is strictly fixed (perfectly inelastic.Unlike labor and capital, the total supply of land is strictly fixed (perfectly inelastic.

14. Demand Determines Price The price of a good that is in fixed supply is demand determined.The price of a good that is in fixed supply is demand determined. Because land is fixed in supply, its price is determined exclusively by what households and firms are willing to pay for it.Because land is fixed in supply, its price is determined exclusively by what households and firms are willing to pay for it. The return to any factor of production in fixed supply is called pure rent.The return to any factor of production in fixed supply is called pure rent.

15. Land in a Given Use vs. Land of a Given Quality The supply of land in a given use may not be perfectly inelastic or fixed.The supply of land in a given use may not be perfectly inelastic or fixed. The supply of land of a given quality at a given location is truly fixed in supply.The supply of land of a given quality at a given location is truly fixed in supply.

16. Rent and the Value of Output Produced on Land A firm will pay for and use land as long as the revenue earned from selling the output produced on that land is sufficient to cover the price of the land.A firm will pay for and use land as long as the revenue earned from selling the output produced on that land is sufficient to cover the price of the land. The firm will use land (A) up to the point at which:The firm will use land (A) up to the point at which: MRP A = P A

17. The Firm’s Profit-Maximization Condition in Input Markets Profit-maximizing condition for the perfectly competitive firm is:Profit-maximizing condition for the perfectly competitive firm is: P L = MRP L = (MP L X P X ) P K = MRP K = (MP K X P X ) P A = MRP A = (MP A X P X ) where L is labor, K is capital, A is land (acres), X is output, and P X is the price of that output.

18. Impact of Technological Change Technological change refers to the introduction of new methods of production or new products intended to increase the productivity of existing inputs or to raise marginal products.Technological change refers to the introduction of new methods of production or new products intended to increase the productivity of existing inputs or to raise marginal products. Technological change can, and does, have a powerful influence on factor demands.Technological change can, and does, have a powerful influence on factor demands.