Factor Markets

Firm’s Marginal Product Revenue Curve (MPRC)

• demand is coming from firms

• supply is coming from the people

Key Concepts

• Marginal Product of Labor (MPL): The additional output produced by employing one more unit of labor

• Marginal Revenue (MR): The additional revenue generated from selling one more unit of output

• Marginal Revenue Product of Labor (MRP_L): The additional revenue a firm earns by employing one more unit of labor. It is calculated as:​

  • MRP_L = MPL x MR

• The line on the MPR graph represents MB

• Profit Maximization Rule: A firm maximizes profit by employing labor up to the point where the MRP_L equals the wage rate

Application in Factor Markets

• Labor Demand Curve: The MRP_L curve represents the firm's demand for labor

• Wage Determination: In competitive labor markets, wages are determined where the supply of labor intersects with the MRP_L curve

  • hire until MRP = wage rate

Labor Markets

Key Concepts

• Labor Market: The market where individuals supply their labor to firms in exchange for wages

• Supply and Demand: Just like goods and services, labor markets are influenced by supply and demand. The supply curve for labor is upward sloping, indicating that as wages increase, more individuals are willing to work. Conversely, the demand curve for labor is downward sloping, meaning that as wages increase, firms demand less labor

• Equilibrium Wage: The wage rate at which the quantity of labor supplied equals the quantity of labor demanded. At this point, there is no surplus or shortage of labor

• factors such as population size, societal norms, and alternative employment opportunities can shift the labor supply curve

• factors like the demand for the goods and services produced by labor, productivity, and technological advancements can shift the labor demand curve

Application in Factor Markets

• in competitive labor markets, wages are determined by the intersection of labor supply and demand curves.

• changes in factors affecting labor supply and demand can lead to shifts in the equilibrium wage and employment levels