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

is south african economic system more allocative efficient?


What is cost analysis? Cost–benefit analysis known as CBA, sometimes known as benefit–cost analysis BCA, is a systematic process of calculating & comparing profit and costs of a pr

How can we identify that something is elastic or inelastic?  When demand of any commodity does not change with the change in price of that commodity that item is said by inelas

Determinants of Private Demand - Regional Disparity There is imbalance in distribution of facilities. There are over 600000 villages in India. And there were over 8737 degree

What is the difference between MRTS & MRS?

A control in economics means a steady profit rate that is enhancing. Thus, after one year you could have £1mill profit then the next year £3mill profit etc.

Market equilibrium happens where supply equals demand (supply curve intersects demand curve).   An equilibrium implies that there is no force that will cause further changes in pri

Q. Explain General Equilibrium? General Equilibrium: Neoclassical economics presumes that production, employment, investment and income distribution are all determined by a con