# Factor Markets Chapter 18.

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Factor Markets Chapter 18

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

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

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)

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

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

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

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.

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

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