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

how to calculate the volume of exports? or what is the definition?

Explanation of the Break in Trend: An economy can grow in three different ways or all three ways may work simultaneously:   1)  Horizontally, i.e., it may go on producing m

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

discuss the law of variable proportion with the help of isoquants

Given that TC=1000+10Q-0.9Q^2+0.04Q^3,,Find the rate of output Q that result in minimum Average variable cost

PRODUCTION AND PRODUCTIVITY DIAGRAM BEHAVIORAL RELATIONSHIP

Explain consumer sovereignty and why it might not be that extensive in real life. Explanation of consumer sovereignty Use of S/D model to show how changes in consumption pat

Law of mass action states that at a constant temperature rate of a chemical reaction is directly proportional to product of active masses of the reactants raised to the power equal

Problem: (a) "Economics is the study of how society decides what, how and for whom to produce". Describe the importance of opportunity cost to a society. (b) Distinguish bet