(Microeconomics)
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^^Derived Demand^^: a Factor Market is a collection of the four resources which are essential for production, also known as the factors of production (land, labour, capital entrepreneurs). Derived demand relates both the factor market and the product. These two are directly related as the demand for products = demand for factors of production. For example, a service or good would not exist if it weren’t for the factors which produced it. Without the availability of factors of production, these products would not be produced.
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T^^he Marginal Revenue Product (MRP^^): when extra input is employed (labor), it increases a firm’s revenue subsequently, which is what MRP is. The graph represents a downsloping demand curve which indicates that additional labor will increase its revenue.
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^^The Marginal Factor Cost (MFC)^^: also known as the marginal resource cost or MRC, which is the downside of employing additional labour as it will lead to loss of revenue.
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^^The least cost rule:^^ states that in an effort to minimise costs, firms will adjust or shift the ratio of inputs until capital is equal to labour. It is very typical of firms to aim to produce at the least possible cost.
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^^Monopsony^^: is when only one buyer of a good or service exists, meaning that the buyer is capable of setting the price. This is considered to be the monopoly of the factor market. A downside of this is occurs when those in charge underpay workers than they normally would in a competitive market.
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Factors: These are able to shift the demand and supply for specific resources. A decrease in labour costs will decrease the demand for workers in other sections.
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Employers tend to evaluate whether the additional revenue generated is greater than the cost of hiring a worker, which is one of the main reasons why employees do not often get replaced.
^^The Marginal Revenue Product (MRP):^^ addition to the firm’s revenue in the event where additional input is employed.
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Finding the MRP is the first step, the next step is to determine the value of labour in the factor market when calculating the Marginal factor Cost (MFC). MFC is the added costs to a firm in the event where they hire additional input such as a machine or worker.
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^^TIP^^: A firm continues to maximise profits by hiring inputs in production in case if MRP>MFC. This is up until the point of the profit maximising point is MRP=MFC. if MRP<MFC, the firm will stop using that input as it costs more than what the firms produces in revenue.
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This market consists of many firms who hire workers with similar skills and abilities. These firms are wage takers, instead of price makers.
The reason why these firms are wage takers is that they hire a percentage of people to do their labour, which has little influence on the market wage. They must be open to pay their workers a market determined wage rate.
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A minimum wage which is effective has a direct effect on the labor market and individual firms. If a price floor for minimum wage is set, the wage will decrease, however, this will lead to a decrease in the quantity hired for workers in the labor market.
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Similar to monopoly, however, in this case there is only a one sole buyer of this labor.
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