ECO101H1 Lecture Notes - Wvmp, Perfect Competition, W. M. Keck Observatory

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20 Jan 2011
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ECO101H1 Full Course Notes
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Topic 12 j markets for factors of production (jan 10th) Outline: the factors of production, derived demand for labor: an example; Demand for labor = mrp of labor. P=mc & w=vmp: interdependence of product and factor markets, workers are paid their mrp/vmp. Insight: demand for factors is a derived demand: (vmp) value of marginal product = (mrp) marginal revenue product. - economic explanation of how compensation is determined; e. g. firm produces widgets (perfect competition); Labor is variable factors (principle of dmp applies); Therefore assumed short-term, and fixed costs exist; - firm will not hire a worker unless his vmp is at least equal to the wage rate; e. g. if w=, firm will not hire the 3rd worker since this worker is paid only to contribute . - therefore since w=, the firm will hire three workers: profit-maximizing behavior of competitive firm;

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