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

Theory, who propounded the pure international theory of trade?

who propounded the pure international theory of trade?

Origin of sylos labini''''s limit pricing model, write about the origin of ...

write about the origin of sylos labini''s limit pricing model

Explain fixed capital and flat-rate tax, Q. Explain Fixed Capital and Flat-...

Q. Explain Fixed Capital and Flat-Rate Tax? Fixed Capital: Realcapital which is installed permanently in a specific location, including infrastructure, buildings and major eq

Calculate the price of a forward contract, Commodities A) It i...

Commodities A) It is well documented that commodity prices are very volatile when compared to other asset classes.  Discuss factors that cause volatility in the commod

Inverse market demand curve, Problem: i) The  inverse market demand cur...

Problem: i) The  inverse market demand curve for a Stackelberg leader and follower is given by  P = 10  - Q. If each has  a marginal cost of $4, what will be the equilibrium qu

Price mechanism, how does the prices system affect a country

how does the prices system affect a country

INTERMEDIATE MICRO ECONOMICS, AS STUDENT OF ECONOMICS ELABORATE ON THE KALD...

AS STUDENT OF ECONOMICS ELABORATE ON THE KALDOR-HISCKS COMPENSATION

Resource markets, Business sell to households in the resource markets, but ...

Business sell to households in the resource markets, but households sell to businesses in the product market

Break-even point, How to I calculate the break-even point per unit in dolla...

How to I calculate the break-even point per unit in dollar amount and then determine whether there will be a profit or loss? Such as if the fixed costs were $75000. The variable co

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