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)

5.2 - Changes in Factor Demand and Factor Supply

• These factors determine the supply and demand of these quantities

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

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