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# 5 - Announcements Problem Set 2 Due Solutions posted by...

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1 07/11/07 Economics 1 Lecture 5 Announcements Problem Set 2 Due – Solutions posted by tonight Midterm 1 – 10 Evans, 10:10-11:00 Sharp! – No calculators – No lecture after exam – Re-grade policy – Interruption policy – No Blue-books 07/11/07 Economics 1 Lecture 5 Chapter 10 Input Demand: The Labor and Land Markets 07/11/07 Economics 1 Lecture 5 Firm and Household Decisions 07/11/07 Economics 1 Lecture 5 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. – Inputs are demanded by a firm if, and only if, households demand the good or service produced by that firm. – Demand for labor and land are examples of derived demand. 07/11/07 Economics 1 Lecture 5 Inputs: Complementary and Substitutable • The productivity of an input is the amount of output produced per unit of that input. Inputs can be complements or substitutes. – A firm’s input demands are tightly linked together. 07/11/07 Economics 1 Lecture 5 Marginal Product and Marginal Revenue Product The Marginal Product (MP) of a variable input is the additional output produced by one additional unit of input. The Marginal Revenue Product (MRP) of a variable input is the additional revenue a firm earns by employing one additional unit of input. Inputs have MP and MRP, outputs do not.

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2 07/11/07 Economics 1 Lecture 5 Marginal Revenue Product MRP- additional revenue resulting from employment of one additional unit of input. MRP = MP x P o where P o is the price of output. 07/11/07 Economics 1 Lecture 5 Marginal Revenue Product Example Price of sandwiches = \$5 One additional worker will produce 10 sandwiches per hour (MP L =10 sandwiches/hour ) • MRP L for the sandwich shop is… MRP L =MP L x P s = 10 x \$5 = \$50/hour 07/11/07 Economics 1 Lecture 5 Marginal Revenue Product Per Hour of Labor in Sandwich Production (One Grill) 50.00 5.00 10 35 3 25.00 5.00 5 40 4 10.00 5.00 2 42 5 0 5.00 0 42 6 75.00 5.00 15 25 2 50.00 \$ 5.00 \$ 10 10 1 - - - 0 0 (5) MARGINAL REVENUE PRODUCT ( MP L X P X ) (PER HOUR) (4) PRICE ( P X ) (3) MARGINAL PRODUCT OF LABOR ( MP L ) (SANDWICHES PER HOUR) (2) TOTAL PRODUCT (SANDWICHES PER HOUR) (1) TOTAL LABOR UNITS (EMPLOYEES) Marginal Revenue Product 07/11/07 Economics 1 Lecture 5 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. MRP L = P X x3 MP L 0 5 10 15 0 1 2 3 4 5 6 7 Units of labor Marginal Product (units of output) 0 25 50 75 0 1 2 3 4 5 6 7 Units of labor Marginal revenue product (\$) Marginal Revenue Product 07/11/07 Economics 1 Lecture 5 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.
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