Factor markets, Microeconomics

Assignment Help:

A firm in a perfectly competitive product market takes the price of the product as given. Similarly, a firm in a perfectly competitive factor market takes the price of the factor as given. The firm can hire as much of the input as it wants at the given price. Thus, the supply curve of the input to the firm is a horizontal line at the input price.

Firms seek to maximize their profits. Their decisions regarding how much inputs to hire will be equal to the level that maximizes its profits. Profit maximizing condition for input usage is MRP = MRC. While MRC is the marginal resource cost or the change in total cost due to the employment of an additional unit of an input, MRP is the marginal revenue product or the change in total revenue resulting from the employment of an additional unit of an input. If MRP > MRC then the firm should hire more laborers but it should cut down the labor force if MRP < MRC.

Marginal product (MP) is the change in the quantity of output that results from the employment of an additional unit of an input. Value of marginal product (VMP) is the price of the output multiplied by the marginal physical product of the input. If a firm is a perfect competitor in the product market, MR = P.

Then,   MRP = MR . MP

                     = P . MP

                     = VMP

So, for a firm that is a perfect competitor in the product market the profit maximizing condition can be restated as VMP = MRC. If a firm is not perfectly competitive in the product market, then MRP < VMP.

Suppose the firm is also perfectly competitive in the labor market. So the MRC is the same as the price of labor or the market wage (w). The profit maximizing condition can be again re-written as VMP = w.

Once you have thoroughly understood the principles and functioning of the product market, you can easily apply what you have learnt to the factor market. If you face problems or if you have assignments to hand over, contact Expertsmind for their online tutoring or assignment help services.


Related Discussions:- Factor markets

Fundamental economy problem., how a capitalist system solves the three fund...

how a capitalist system solves the three fundamental economic problems

Analyze the characteristics of a monopoly market, Question 1: (a) Descr...

Question 1: (a) Describe the three different ways of calculating national income. (b) Does the National Income figure accurately reflect the living standardof a population?

Theory of firm, critically analysis firm theory of profit maximization?

critically analysis firm theory of profit maximization?

Determine the non orthogonal - anova, 1. The two-way ANOVA, non-orthogonal ...

1. The two-way ANOVA, non-orthogonal case, has been a vexing problem for ANOVA researchers for many years.  Please answer the following questions concerning the two-way non-orthogo

Fiscal imbalance, Fiscal Imbalance: The persistent rise in resource ga...

Fiscal Imbalance: The persistent rise in resource gap has led to a growing volume of public debt. The central feature that emerges is a serious fiscal imbalance, arising from

Economics 262, A recent national survey found that high school students wat...

A recent national survey found that high school students watched an average (mean) of 7.2 DVDs per month with a population standard deviation of .90. A random sample of 35 college

Why it is difficult to achieve macro objectives, Why is it so difficult for...

Why is it so difficult for government to achieve all macro objectives simultaneously? Specifically showing possible trade-offs i.e. a) Stimulatory policies which enhance AD

Define the term supply, Demand is defined as a schedule of the quantities f...

Demand is defined as a schedule of the quantities fo good that will be purchased at various prices similarly the supply refers to the schedule of the quantities of a good that will

What is meant by own price elasticity of demand, Problem: i) What is me...

Problem: i) What is meant by ‘own' price elasticity of demand? What factors are likely to affect the size of this elasticity? ii) A publicly owned bus line is running at

Comparison with our needs - structure of national income, Comparison with O...

Comparison with Our Needs: We can further test our performance by juxtaposing it with our requirements. Admittedly, it is very difficult to determine 'needed' rate of growth w

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd