Factors of production: the inputs used to produce goods and services.
Competitive profit-maximizing firm
Competitive: in market for apples (seller) and apple pickers (buyer). Price taker.
Decide how many apples to sell and workers to hire
Profit maximizing: wants profit (revenue)
Production function and marginal product of labor
How the size of its workforce affects amount of output produced
Production function: relationship between the quantities of inputs (apple pickers) used
to make a good and the quantity of output (apples) of that good.
Marginal product of labor: the increase in the amount of output from an additional unit
Diminishing marginal product: the property whereby the marginal product of an input
declines as the quantity of the input increases.
Value of the marginal product and demand for labor
To find profit from each additional worker: (worker’s contribution to revenue) –
Contribution to revenue = (price of apples) X (marginal product of labor)
Value of marginal product: the marginal product of an input times the price of the
Diminishes as number of workers hired rises
Firm hires workers up until the (market wage) equals the (value of the marginal product
of labor) (labor demand curve)
What causes the labor-demand curve to shift
Output price: value of marginal product = output X price; so when output price changes,
it will change the curve.
Technological change: cause increase in outputs of labor, so increase demand for labor
shifting curve out. Creation of robots can shift inward because no need for labor