L14Factors - Introduction to Microeconomics Factors of...

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1 Introduction to Microeconomics Lecture 14 Factors of Production and Factor Markets Simon Cowan Outline z Factors of Production and Marginal Productivity z The Marginal Revenue Product of Labour and factor demand z Factor Markets in the whole economy z Factor Markets and Market Power z The Minimum Wage Factors of Production z Firms use inputs (“factors of production”): labour, materials, energy, services, capital equipment z What determines firms’ demands for factors of production? z What kind of markets are those factors bought in? z How does the nature of those markets determine factor usage? Marginal Productivity z A factor of production is not demanded for its own sake, but for its contribution to output and profit: factor demand is a “Derived Demand” If a firm takes on one more unit of a factor say z If a firm takes on one more unit of a factor, say labour, what does this do to output? z Marginal (Physical) Product of Labour: () dQ MPL Q L dL == Different Marginal Products z Value of the Marginal Product of Labour VMPL = p × MPL z Marginal Revenue Product of Labour MRPL = MR × MPL Factor Demand z Profit-maximising firms will keep adding units of a factor of production so long as each unit’s contribution to revenue (MRPL) is greater than its contribution to cost (its wage contribution to cost (its wage) z Therefore the Factor Demand curve (for Labour) is the MRPL curve
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2 Optimal input choice £ MRPL Labour w 1 w 2 L 1 L 2 What shifts the demand for labour?
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L14Factors - Introduction to Microeconomics Factors of...

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