ECO101H1 Study Guide - Final Guide: Wvmp, Perfect Competition, Marginal Revenue
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Topic 12 – Markets for Factors of Production
1. The Factors of Production
2. Derived Demand for Labor: An Example;
- MRP(VMP) of labor;
- Profit-Maximizing Behavior of Competitive Firm;
- Demand for Labor = MRP of Labor
- P=MC & W=VMP
3. Interdependence of Product and Factor Markets
4. Workers are Paid their MRP/VMP
The Factors of Production
-- Capital (equipment; structures);
Derived Demand for Labor
Insight: Demand for factors is a derived demand;
1. (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;
- P=$5, Wage(W) = $150/day
Number of workers
- Question: how many workers will the firm hire?
-- Firm will not hire a worker unless his VMP is at least equal to the wage rate;
e.g. if W=$200, firm will not hire the 3rd worker since this worker is paid $200 only to contribute $150.
-- Therefore since W=$150, the firm will hire three workers.
2. Profit-Maximizing Behavior of Competitive Firm;
-- Firm hires workers until VMP=W;
-- If n=2, VMP>W; hire more workers;
-- If n=4, VMP<W; hire less workers;
-- If n=3, VMP=W; profits are maximized;
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