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

2. Derived Demand
Demand for the factors of production

4. 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

5. How much to purchase the good?

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

8. Value of Marginal Revenue Product Graph

9. 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!)

11. 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.

12. Supplying Labor
Remember the circular flow model?
Workers supply labor

13. The Labor Market

14. 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

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

17. 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