Chapter 13

# Chapter 13 - Chapter 13 Firms purchase factors to produce...

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Chapter 13 Firms purchase factors to produce products to sell → true for all firms Derived demand – demand that is the results of some other demand. Demand for factors is a derived demand. It is derived from and directly related to the demand for the final product that the resources produce If demand for product rises, demand for factors used to produce the product rises. Product demand falls, factor demand falls Marginal Revenue Product (MRP) – additional revenue generated by employing an additional factor unit Can be calculated 2 ways: o MRP = ∆TR / ∆Quantity of the factor o MRP = MR * MPP Exhibit 1 pg. 324 Exhibit 2 pg. 324 MRP curve = factor demand curve Value Marginal Product (VMP) – price of the good multiplied by the marginal physical product of the factor o VMP = P * MPP (measure of the value that each factor unit adds to the firm’s product) VMP helps firms decide how many units of the factor to hire Given that MRP = MR * MPP and VMP = P * MPP, then because P = MR for perfectly competitive firm: MRP = VMP for perfectly competitive firm Exhibit 3 pg.326 Price searchers – downward sloping demand curves o P > MR and so VMP (P * MPP) is greater than MRP (MR * MPP) Marginal Factor Cost – additional cost incurred by employing an additional factor unit

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o MFC = ∆TC / ∆Quantity of the factor Factory Price Taker – a firm that can buy all it wants of a factor at the equilibrium price
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## This note was uploaded on 11/03/2009 for the course ECON 2000 taught by Professor Roussell during the Fall '06 term at LSU.

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Chapter 13 - Chapter 13 Firms purchase factors to produce...

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