Knowt
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)
5.2 - Changes in Factor Demand and Factor Supply
Determinants of Labor Demands (DL) | Determinants of Labor Supply (SL) |
|---|---|
R.O.D | P.I.N |
1. Productivity of the Resource | 1. Personal values |
2. Price of Other resources | 2. Intervention by Government |
3. Product demand | 3. Number of Qualified workers |
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
