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

Measures used to restrict international trade, Measures used to restrict In...

Measures used to restrict International Trade: These are taxes imposed on traded commodities as they cross national boarders. These are two main types of tariffs. An import ta

International monetary fund, International Monetary Fund: The Internat...

International Monetary Fund: The International Monetary Fund (IMF), the World Bank and the International Trade Organisation were conceived at the Brettonwoods Conference in Ju

PPC help, I don''t understand PPC at all

I don''t understand PPC at all

Market Penetration, Market Penetration: Indian entrepreneurs have to ...

Market Penetration: Indian entrepreneurs have to constantly bear in mind the fast changing trade trends and re-orient their strategies to derive higher yields by way of large

Difference between accounting profit and economic profit, Difference betwee...

Difference between accounting profit and economic profit: The difference between accounting profit and economic profit is that economists include in total cost of production b

Production possibility frontier, Halala is a small country that uses most o...

Halala is a small country that uses most of Its resources to produce fruits and vegetables. If the country produces only fruits it is able to produce 8000kg of fruit per year. If i

Market supply labour, use a graphical illustration to describe briefly what...

use a graphical illustration to describe briefly what the influence of each of the following be on the market supply of labour,(a) an increase in immigrants, (b) a reduction in wag

Normal and abnormal profits., the diagram used to illustrate abnormal and n...

the diagram used to illustrate abnormal and normal progits

High risk individuals, a) Describe and derive the equilibrium contract offe...

a) Describe and derive the equilibrium contract offered to high risk individuals.                                             b) Describe and derive the equilibrium contract offe

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