Coursenotes_ECON301

Coursenotes_ECON301

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Unformatted text preview: rom the usual balance of costs and benefits by a producer. For example, consider a competitive firm having the following simple production function which takes a single variable factor input...say, labour: Q = f (L) where, Q denotes the level of output produced, and L denotes the amount of labour input required. PHYSICAL UNITS Marginal (Physical) Product The marginal (physical) product of labour is the change in the output level as a result of a change in the quantity of labour input. MP = Q / L MP refers to the change in the output measured in physical units of output as a result of a marginal change in labour. On the benefit side, MP measures the marginal benefit to the firm in terms of physical units. DOLLAR VALUES Marginal Revenue Product The marginal revenue product of labour is defined as the product of the output price and the marginal (physical) product of labour. MRP = MP P MRP refers to the change in revenue measured in dollar values as a result of a marginal change in labour. On the benefit side, MRP measures the marginal benefit to the firm in dollar values. 48 COST CALCULATION In a competitive labour market, the labour wage is taken as given by the firm. For each additional unit of labour hired, the firm has to pay the labour wage in physical units (w / P). This is the real wage. COST CALCULATION In a competitive labour market, the labour wage is taken as given by the firm. For each additional unit of labour hired, the firm has to pay the Labour wage in dollar terms (w). This is the nominal wage. On the cost side, w measures the marginal cost to the firm in terms of dollar values. COST VS BENEFIT The optimal decision for the firm is to hire labour up to the point where MRP = w. Where did the (w) come from? On the cost side, (w / P) measures the marginal cost to the firm in terms of physical units. COST VS BENEFIT The optimal decision for the firm is to hire labour up to the point where MP = (w / P). Where did the (w / P) come from? In perfectly competitive labou...
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This note was uploaded on 05/25/2010 for the course ECON 301 taught by Professor Sning during the Spring '10 term at University of Warsaw.

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