Chapter 10: Factor Markets

Marginal revenue product (MRP)

Measures the value of what the next unit of a resource (e.g., labor) brings to the firm. MRPL = MR × MPL. In a perfectly competitive product market, MRPL = *P* × MPL. In a monopoly product market, MR

Marginal resource cost (MRC)

Measures the cost the firm incurs from using an additional unit of an input. In a perfectly competitive labor market, MRC = Wage. In a monopsony labor market, the MRC > Wage

Profit-maximizing resource employment

The firm hires the profit-maximizing amount of a resource at the point where MRP = MRC

Demand for labor

Labor demand for the firm is the MRPL curve. The labor demand for the entire market DL = ∑MRPL of all firms

Derived demand

Demand for a resource like labor is derived from the demand for the goods produced by the resource

Determinants of labor demand

One of the external factors that influences labor demand. When these variables change, the entire demand curve shifts to the left or right

Least-cost rule

The combination of labor and capital that minimizes total costs for a given production rate. Hire L and K so that MPL/*P*L = MPK/*P*K or MPL/MPK = *P*L/*P*K

Monopsonist

A firm that has market power in the factor market, i.e., a wage setter