L14Factors - Introduction to Microeconomics Lecture 14...

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Introduction to Microeconomics Lecture 14 Factors of Production and Factor Markets Simon Cowan
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Outline Factors of Production and Marginal Productivity The Marginal Revenue Product of Labour and factor demand Factor Markets in the whole economy Factor Markets and Market Power The Minimum Wage
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Factors of Production Firms use inputs (“factors of production”): labour, materials, energy, services, capital equipment What determines firms’ demands for factors of production? What kind of markets are those factors bought in? How does the nature of those markets determine factor usage?
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Marginal Productivity 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 labour, what does this do to output? Marginal (Physical) Product of Labour: ( ) dQ MPL Q L dL = =
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Different Marginal Products Value of the Marginal Product of Labour VMPL = p × MPL Marginal Revenue Product of Labour MRPL = MR × MPL
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Factor Demand 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) Therefore the Factor Demand curve (for Labour) is the MRPL curve
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Optimal input choice Labour £ w 1 w 2 MRPL L 1 L 2
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What shifts the demand for labour? MRPL shifts out if
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This note was uploaded on 04/12/2010 for the course ECON DEAM taught by Professor Vines during the Spring '10 term at Oxford University.

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L14Factors - Introduction to Microeconomics Lecture 14...

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