Factor markets, Microeconomics

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.

Posted Date: 3/13/2013 1:16:52 AM | Location : United States







Related Discussions:- Factor markets, Assignment Help, Ask Question on Factor markets, Get Answer, Expert's Help, Factor markets Discussions

Write discussion on Factor markets
Your posts are moderated
Related Questions
Wage Labour: A form of work in that employees perform labour for others, under their direction, in return for salaries orwages. Employer controls and owns the product of the labour

Illustrate and discuss the impliction of various market structures(competitive and non-competitive)

Estimating Labour Productivity by Economic Sector for Target Year and its Change between Base and Target Year Contribution of each sector to GDP is known. The contribution of

Explain why each of the following factors may influence the own price elasticity of demand for a commodity. (i) Consumer preferences, that is, whether consumers regard the commod

Protection of infant firms: Infant industries are those firms, which are young. The absence of economies of scale to them makes their unit cost of production higher than older

EXCHANGE RATE SYSTEM: It is interesting to look at a case study of a country like India for several reasons: first it is a small country in terms of imports and exports as a p

Which element of the periodic table has the most characteristics and is used in everyday life?

Government Spending Wagner's Law of economic activities applies to every economy. According to this law, there is both an extensive and intensive increase in government activit


Analyze the sustainable approach to waste reduction developed by the company you selected. Include the following: Its products Previous methods of production The way it implemented