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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. I

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Department
Economics
Course
ECO101H1
Professor
James Pesando
Semester
Winter

Description
Topic 12 – Markets for Factors of Production (Jan 10 )h 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; rd e.g. if W=$200, firm will not hire the 3 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
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