Unit 5 Fall ~ Resource Markets

factor markets

- factors are resources

- producers are buyers (they purchase resources)

- households are sellers (they sell their resources such as land, labor, and capital)

marginal revenue product (MRP)

the addition to a firm's total revenue when an additional input is employed (marginal revenue * marginal product)

marginal factor cost (MFC)

the additional cost of employing an additional input (wage of the workers)

where does a firm maximize its profits in a factor market?

MRP = MFC

what happens if a firm sees its MRP > MFC?

it will hire its next input

what happens if a firm sees its MRP < MFC?

it will not hire that input

monopsony

occurs when there is one buyer of labor

changes in the product demand

if the product is in more demand, there will be an increase in resource demand

changes in productivity

if a firm is more productive, there will be an increase in resource demand

changes in the price of other resources

- if a substitute resource B is cheaper, the original resource A will be in less demand

- if a complementary resource B is cheaper, the original resource A will be in more demand

what is a worker's wage determined by?

equilibrium in a supply and demand graph

labor market and firm graphs (perfect competition)

- a firm's MRP decreases and is the same as the Demand for Labor as with increases in the quantity of labor causes MRP to decrease

- MFC is at the wage set by the labor market's equilibrium price (wage)

wages

constant as the firm is a wage taker and has no control over wages

minimum wage (perfect competition)

if a minimum wage is in effect, wages will increase, but the quantity of workers employed will decrease

what happens if a monopsony exists?

- the supply and MFC curves are upward sloping

- supply curve is upward sloping as the monopsonist is a wage maker

- MFC curve slopes upward faster than supply

- wages and the number of workers both decrease

why does the MFC curve slope upward faster than supply?

as the monopsonist hires more workers, it must pay higher wages to attract these workers

least cost rule

- when a firm wants to maximize profit

- a firm minimizes the cost of producing any given level of output when the marginal product per dollar spent is equal across all inputs