Chapter 3 - output produced (called the input’s marginal...

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Chapter 3 -The fundamental assumption of labor demand theory is that firms seek to maximize profits. -A firm can only make changes to variables that are within its control. -B/c the price a firm can charge for its product and the prices it must pay for its inputs are largely determined by the market, profit-maximizing decisions by a firm mainly involve the question of whether, and how, to increase or decrease output. -Must focus on marginal changes since major decisions of whether to open a new plant or intro a new product line are rare. -The profit-maximizing firm will want to expand output by one unit if the added revenue from selling that unit is greater than the added cost of producing it. As long as the marginal rev from an added unit of output exceeds its marginal cost, the firm will continue to expand output. -Profits are maximized when output is such that marginal rev equals marginal cost. -The marginal income associated with a unit of input is found by multiplying the change in physical
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Unformatted text preview: output produced (called the input’s marginal product) and the marginal revenue generated per unit of physical output.-Therefore call the marginal income produced by a unit of input the input’s marginal revenue product.-Marginal product of labor is the change in physical output produced by a change in the units of labor, holding capital constant.-MPl =change in Q / change in L-Marginal product of capital will be defined as the change in output associated with a one-unit change in the stock of capital, holding labor constant.-MPk = chang in Q/ change in K-If there is a perfectly competitive market, and the firm has no control over product price, the marginal revenue per unit of output sold is equal to product price (P).-If the firm has some degree of monopoly power in its market, extra units of output can be sold only if product price is reduced. (MR < P)-Marginal revenue product of labor = marginal product of labor x marginal revenue....
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This note was uploaded on 01/24/2009 for the course ILRLE 2400 taught by Professor Smithr during the Fall '07 term at Cornell.

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