Unit 5 - Factor Markets Guide

[[5.1 - Introduction to Factor Markets[[

  • @@Factor markets@@: is a resource for companies to buy what the need to produce their goods and services

  • Derived demand : the demand from a resource is derived by product demand

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

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

  • Least cost rule : marginal product of labor/price of labor = marginal product of capital/price of capital (MPL/PL=MPK/PK)

    • Buy more of the one with a higher sum, and less of the one with a smaller sum (to explain, as you increase, diminishing marginal returns kicks in)

    Fig. 1 Perfect Competition

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[[5.2 - Changes in Factor Demand and Factor Supply[[

^^Determinants of Labor Demands (DL)^^^^Determinants of Labor Supply (SL)^^
R.O.DP.I.N
1. Productivity of the Resource1. Personal values
2. Price of Other resources2. Intervention by Government
3. Product demand3. Number of Qualified workers
  • These factors determine the supply and demand of these quantities

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[[5.3 - Profit-Maximising Behaviour in Perfectly Competitive Factor Markets[[

  • Market curve : standard supply and demand curve
  • Equilibrium wage in the market : establishes the wage that firms will pay workers
  • MRP=MRC!!!!
  • Firms will not hire if MRC>MRP, as they will be at a loss

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Fig. 2 Profit Maximisation

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[[5.3 - Monopsonistic Markets[[

  • Many sellers, one buyer

  • Monopsonies pay a lower wage and hire less than perfect competition

    • This market is an example of Imperfect competition
  • MRP=MFC

  • MFC > supply

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