1. Chapter 18: The Market for Inputs
Factor Markets
Chapter 18: The Market for Inputs

2. Product & Factor Markets
How many goods
to Produce?
Revenue
Spending
PRODUCT
Markets
Goods
and services
sold
Goods and
services
bought
FIRMS
HOUSEHOLDS
FACTOR
Markets
Factors of
production
Labor, land,
capital & entrepreneurship
How many inputs to hire?
Wages, rent,
and profit
Income
= Flow of inputs
and outputs
= Flow of dollars

3. The Big Picture: Labor Market
The Market for Nurses
Wages of
Based on Supply & Demand
Price = Wage Rate
More Demand => Wages rise
More Supply => Wages fall
Etc….
Nurses
Demand
Supply E1 Q W
Quantity of
Nurses

4. Land, Labor, Capital, Technology, etc…
Derived Demand
Demand for a factor of production is a derived demand:
Demand for an input (factor) is derived from demand for a firm’s output
Demand
Product ↑
Leads to
↑ Demand for Factors of Production
Land, Labor, Capital, Technology, etc…

5. - The apple market is a competitive market
- Demand for apple pickers is derived from the market demand for apples
The Market for Apples
The Market for Apple Pickers
Price of
PRODUCT
Market
Wage of
FACTOR
Market
Apples
Apple
Pickers
Supply
Demand
Demand
Supply P Q Q W
Quantity of
Quantity of
Apples
Apple Pickers
Labor markets, like other markets, are governed by the forces of supply & demand
Copyright©2003 Southwestern/Thomson Learning

6. Marginal Revenue Product (MRP)
MRP = marginal product of input x market price of output
Measures the value in dollars of the product produced
Is the demand curve for factors of production
MRP = MP (of input)  P (of output)
MRP = Δ in Total Revenue / Δ in Factor Qty (inputs)

7. Marginal Revenue Product (MRP)
MRP = MP (of input)  P (of output)
For a competitive firm Price = MR (price taker) Assume Output Price = $0.50
Qty Total Marginal Price MRP
Labor Product Product
___ ___ ___
___ ___ ___
___ ___ ___
___ ___ ___

8. Labor Demand Curve The MRP of labor is the labor demand curve Market
wage

9. To Maximize Profit: MRP = MFC
Marginal Factor Cost (MFC)- additional cost to hire one additional factor (input)
A competitive firm hires any resource up to the point where MRP = MFC
For Labor, MFC = Wage Rate
They are wage takers in the factor market

10. Practice Problem
Lesson 2, Activity 44

11. How many workers should you hire?
T-Shirt Market
Labor Market
Price
Wages S
MRP
$20 E1
MFC
$150 D Q
Qty
Qty
MFC = $150

12. All of Microeconomics in one slide….
You Buy Something when:
Firms produce another unit when:
Firms hire another worker when: