Demand for Factors of Production Land Labor Capital (Modules 69-73) #Derived

Derived Demand Demand for the factors of production

Marginal Revenue Product Synonymous for demand for labor Extra revenue each additional worker adds to total revenue MRP= Marginal product of labor * Price of the Product MRP= MPL * P

How much to purchase the good?

How many workers to hire? Reminders: Goal of any firm…. Circular flow of money model (factor market) Cost of inputs Marginal Product of Labor

Value of Marginal Revenue Product Graph

Factors that shift the MRP (demand for labor) Change in the price of the product (output) Change in the supply of other factors of production (more land, more machinery, etc) Change in technology (could increase or decrease demand for labor- read carefully!)

Elasticity of Derived Demand Price elasticity of demand for final product. Ease of substitution for the variable input. Percentage of total cost of the particular input. Length of time being considered.

Supplying Labor Remember the circular flow model? Workers supply labor

The Labor Market

Wage Rates Price of labor Firms buying resources Wage Rates are a firm’s marginal resource (factor) cost MRC = MFC (Same thing) MRC= extra costs associated with hiring an additional worker MRP= MRC to maximize profits Or MC= W/MPL

MFC (MRC)=MRP “That is where you want to be!”

Remember Consumer Optimum? Maximizing Utility (p. 463) MU of good A/ Price of good A= MU of good B/ Price of good B So…Costs of inputs are minimized when MPP of Labor/ Price of Labor = MPP of Capital/ Price of Capital= MPP of Land/ Price of Land