Microeconomics: Unit 5 - Factor Markets

Introduction

• Presented by Jer Breed from revieweon.com.
• Focus on factor markets, particularly labor.
• Associated materials available on revieweon.com.

Factors of Production

• Three key factors: Land, Labor, Physical Capital.
• Payments:
  • Land: Rent
  • Labor: Wages
  • Capital: Interest

Production Function

• Relationship between labor hired and output produced.
• Phases of the Law of Diminishing Marginal Returns:
  1. Increasing Marginal Product
  2. Diminishing Marginal Returns
  3. Negative Marginal Product

Marginal Revenue Product (MRP)

• Calculated as Marginal Revenue x Marginal Product.
• Determines how many workers a business should hire.
• Firm's demand for labor equals MRP.

Profit Maximization

• Firms hire workers where MRP equals wage.
• Example: Firm hires up to 4 workers if wages are $50.

Market Demand for Labor

• Downward sloping demand curve.
• Inverse relationship between wage and number of workers hired.
• Businesses are demanders in this market.

Market Supply of Labor

• Upward sloping supply curve.
• Positive relationship between wage and number of workers willing to work.
• Households supply labor.

Changes in Factor Markets

• Labor demand curve is derived from product price, product demand, and worker productivity.
• Shifts in demand/supply impact MRP and equilibrium.

Equilibrium Wage

• Determined by interaction of supply and demand.
• Increase in demand leads to higher wage and quantity of workers hired.

Perfectly Competitive Factor Markets

• Many buyers of labor; firms are wage takers.
• Marginal Resource Cost (MRC) equals market wage.
• Profit-maximizing number of workers where MRP equals MRC.

Monopsony

• A single buyer of labor (similar to monopoly).
• Firm's supply curve is market supply curve.
• MRC is higher than wage due to wage increase for all workers.
• Monopsony pays lower wages and hires fewer workers than competitive market.

Least Cost Combination of Resources

• Similar to utility maximizing combinations.
• Compare marginal product per price of labor and capital.
• Employ more of the resource with higher marginal product per dollar.

Conclusion

• Comprehensive understanding aids in exam preparation.
• Further resources available at revieweon.com.
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