# Winston Churchill High School

## Presentation on theme: "Winston Churchill High School"— Presentation transcript:

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

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.

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

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

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

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 ↑

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

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

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

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