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

Effect of gasoline tax with rebate, Effect of Gasoline Tax with Rebate ...

Effect of Gasoline Tax with Rebate Assume -Income = $9,000 - Price of gasoline = $1

Supply, concept of supply

concept of supply

#titleindirect utility function .., #question.hif indirect utility function...

#question.hif indirect utility function is givenhow to derive the demand function .

The economy is in the steady state, Assume in the Solow growth model that s...

Assume in the Solow growth model that s=.25, n=.02, d=.08, and f(k)=k^3. A)    Assume that z=2.  What is the steady state level of capital per worker and consumption per worker?

Example of consumer surplus, Example: The Value of Clean Air Air is fre...

Example: The Value of Clean Air Air is free in sense that we do not pay to breathe it. Question: Are benefits of cleaning up air worth the costs? People pay extra to buy

Elasticity, -1- ASSIGNMENT #1 The demand function for Product X is given by...

-1- ASSIGNMENT #1 The demand function for Product X is given by: Qdx = 80- 2Px- 0.05P²x -0.2Py + 4Pz + 0.01I+ 2A Where: Px Price of good X $120.00 Py Price of related good y $100.0

Effected labor markets, If a minimum wage were imposed below the competitiv...

If a minimum wage were imposed below the competitive equilibrium what would we expect to observe in the effected labor markets?

What is a natural monopoly, What is a natural monopoly Define natural m...

What is a natural monopoly Define natural monopoly as a situation where the advantages of scale a fixed costs are so high that it is impossible to fully exploit them. MC and AC

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