1. Factor Markets

2. A Competitive Firm’s Input Demands
A purely competitive firm is a price-taker in its output and input markets.
It buys additional units of input i until the extra cost of extra unit exceeds the extra revenue generated by that input unit.

3. A Competitive Firm’s Input Demands
For the competitive firm the marginal revenue of a unit of input i is

4. A Monopolist’s Demands for Inputs
What if the firm is a monopolist in its output market while still being a price-taker in its input markets?

5. A Monopolist’s Demands for Inputs
Suppose the firm uses two inputs to produce a single output.
The firm’s production function is
So the firm’s profit is

6. A Monopolist’s Demands for Inputs
The profit-maximizing input levels are determined by
and

7. A Monopolist’s Demands for Inputs
That is,

8. A Monopolist’s Demands for Inputs
That is,
d(p(y)y)/dy = MR(y) < p for all y > 0 so the marginal revenue product curve for a
monopolist’s input =
is lower for all y >0 than is the marginal revenue product curve for a perfectly competitive firm =

9. A Monopolist’s Demands for Inputs
$/input unit xi

10. A Monopolist’s Demands for Inputs
$/input unit wi xi

11. A Monopolist’s Demands for Inputs
$/input unit wi xi
The monopolist demands fewer input units than does the perfectly competitive firm.