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

Differentiate between firm and industry, Differentiate between firm and ind...

Differentiate between firm and industry.   A firm is a business unit produced for the purpose of carrying out some kind of trading activity. The term "firm" is used in many ways

Transfer payments, Transfer Payments: Governments typically redistribute a ...

Transfer Payments: Governments typically redistribute a share of tax revenues back to specified groups of individuals in form of several social programs (like welfare benefits, pub

Supply and demand shifter, What happens to the market for cchicken wings if...

What happens to the market for cchicken wings if the price of beer increases?

Economic chart analysis., show this in a pie chart age = under 20|number of...

show this in a pie chart age = under 20|number of people = 20.90

Utility and consumer surplus, Jeremy is an economics student who loves hamb...

Jeremy is an economics student who loves hamburgers. He could eat any number of them for dinner, but he gets a really bad stomach ache after eating a certain amount. In fact, his u

Market or equilibrium price - demand and supply, Suppose the total demand f...

Suppose the total demand for wheat and the total supply of wheat per month in a market are as follows: a. What will be the market or equilibrium price? What is the equilibrium q

EM13106443, May I get a quote on title EM13106443. Thanks

May I get a quote on title EM13106443. Thanks

Returns to scale, describe returns to scale and give examples of each.

describe returns to scale and give examples of each.

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