AP Economics December 8, Review Unit 3 Exam: Theory of the Firm 2.Begin Unit 4: Factor Markets 3.Unit 4 Exam NEW DATE: Monday, December 22 and Tuesday, December 23.

Factor/Resource Market: Firm is a Seller and a Buyer

The Demand for Resources Factor of production is something (an input) that is used to produce output. Examples: buildings, machinery, land, labor, raw materials Derived Demand: The demand for an input is derived from the demand for the output that the input helps produce.

MRP & MRC Marginal Revenue Product (MRP): change in Total Revenue that results from the employment of an additional worker. MRP =  TR /  L Marginal Resource Cost (MRC): change in Total Cost that results from employment of an additional worker. MRC =  TC /  L A firm maximizes its total profit by using: MRP=MRC Rule

MRC in a Perfectly Competitive Labor Market Each time a firm hires another worker, its cost increases by the price of the labor (P L ) For a firm in a perfectly competitive labor market, MRC = P L (MRC=Wage) (If a firm is not in a perfectly competitive labor market, this is not true.)

The Supply Curve of Labor to a Firm that is a Perfect Competitor in the Labor Market (Firm is a Wage-Taker) Price of Labor Labor PLPL S

AP Economics December 9, Continue Lesson 4-1: MRP as Resource Demand 2.HW: Activity Return Work

Resource Wage (Wage Rate) Quantity of Resource Demanded MRP as Resource Demand Perfectly Competitive Product Market (1) Units of Resource (2) Total Product (Output) (3) Marginal Product (MP) (4) Product Price (5) Total Revenue, (2) X (4) (6) Marginal Revenue Product (MRP) $2 2 $ $ ] ] ] ] ] ] ] ] ] ] ] ] ] ] $18 D=MRP Purely Competitive Firm’s Demand for a Resource LO1 12-8

$ $ $ ] ] ] ] ] ] ] ] ] ] ] ] ] ] $18 Resource Wage (Wage Rate) Quantity of Resource Demanded D=MRP (Pure Competition) Imperfectly Competitive Firm’s Demand for A Resource D=MRP (Imperfect Competition) MRP as Resource Demand Imperfectly Competitive (1) Units of Resource (2) Total Product (Output) (3) Marginal Product (MP) (4) Product Price (5) Total Revenue, (2) X (4) (6) Marginal Revenue Product (MRP) LO Downward sloping at steeper rate due to (1)Diminishing Marginal Productivity (2)Product price drop

AP Economics December 10, Review Activity Lesson 4-2: Optimal Combination of Resources 3.HW: Activities 4-2, 4-3, 4-4

Lesson 4-2 The Optimal Combination of Resources In our Yo-Yo activity, we assumed the firm was operating in the Short Run with fixed capital and labor as its variable resource. Long Run: Firm can change its capital (K) and it labor (L) Q: What combination of L & K should the firm employ? We can Minimize Cost or Maximize Profit…

If a firm wants to produce the most output on a given budget…or…if it wants to produce a given level of output at lowest cost, it uses… The Least Cost Combination Marginal Product Of Labor (MP L ) Price of Labor (P L ) (MRC L ) Marginal Product Of Capital (MP K ) Price of Capital (P K ) (MRC K ) = LO

Least Cost Rule is necessary but not efficient… Profit Maximizing Rule MRP L P L (MRC L ) MRP K P K (MRC K ) = = 1 LO

CapitalMP of CapitalLaborMP of Labor Suppose a firm's marginal product of capital and marginal product of labor schedules are as shown in the table below. The firm hires both capital and labor competitively for $4 and $8, respectively. Its output is sold in a competitive market for $.50 per unit. 1.Suppose the firm is currently using 4 units of capital and 4 units of labor. Is the corresponding output being produced at least cost? How do you know? 2.What combination of labor and capital should the firm use to maximize its profit?