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Final

# ECO101H1 Study Guide - Final Guide: Wvmp, Perfect Competition, Marginal Revenue

3 pages88 viewsWinter 2011

Department
Economics
Course Code
ECO101H1
Professor
James Pesando
Study Guide
Final

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Topic 12 Markets for Factors of Production
(Jan 10th)
Outline:
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
-- Labor;
-- Capital (equipment; structures);
-- Land;
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
Total Product
Marginal Product
VMP/MRP (PxMP)
0
0
-
-
1
50
50
250
2
90
40
200
3
120
30
150
4
140
20
100
- Question: how many workers will the firm hire?
Insight:
-- 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;