Unit 5 - Factor Markets Guide

5.1 - Introduction to Factor Markets

  • Factor markets: resource for companies to buy what they need to produce goods and services

  • Derived demand: demand for a resource is derived from product demand

  • Marginal revenue product (MRP): additional revenue generated by an additional resource/worker

  • Marginal factor cost (MFC): additional cost of an additional resource/worker

  • Least cost rule:

    • $MPL / PL = MPK / PK$

    • Buy more of the one with a higher sum to optimize resources.

5.2 - Changes in Factor Demand and Factor Supply

  • Determinants of Labor Demands (DL):

    • 1. Productivity of the Resource

    • 2. Price of Other resources

    • 3. Product demand

  • Determinants of Labor Supply (SL):

    • 1. Personal values

    • 2. Intervention by Government

    • 3. Number of Qualified workers

5.3 - Profit-Maximising Behaviour in Perfectly Competitive Factor Markets

  • Equilibrium wage: establishes the wage that firms will pay workers

  • $MRP = MRC$

  • Firms will not hire if $MRC > MRP$

5.4 - Monopsonistic Markets

  • Many sellers, one buyer

  • Monopsonies pay lower wages and hire less than perfect competition

  • $MRP = MFC$

  • $MFC > supply$