Part Three: Microeconomics of Factor Markets CHAPTER The Demand for Factors of Production McGraw-Hill Ryerson Ltd. Slides prepared by Bruno Fullone, George Brown College
In this chapter you will learn:. How factor prices are determined. What determines the demand for a factor. What determines the elasticity of factor demand. How a firm arrives at the optimal combination of factors to use in the production process Chapter
. Factor Pricing and Demand Reasons to study how factor prices are determined: Money-Income Determination Resource Allocation Cost Minimization Policy Issues LO.
Marginal Productivity Theory of Factor Demand Factor demand is a derived demand Depends on: Productivity of factor Price of the good it helps to produce LO.
Marginal Productivity Theory of Factor Demand Marginal Revenue Product (MRP) -Productivity Marginal Product (MP) eventually diminishes Illustrated. LO.
Table - The Demand for Labour Units of a factor Total product Marginal product, MP 8 8 Diminishing MP LO.
Marginal Productivity Theory of Factor Demand Marginal Revenue Product (MRP) Productivity Marginal Product (MP) eventually diminishes Product Price Marginal Revenue Product (MRP) Marginal revenue product change in total revenue one unit change in factor quantity LO.
The Demand for Labour Units of a factor Total product Marginal product, MP Product price Total revenue Marginal revenue product, MRP 8 8 $ $ $ 8 LO. 8
Marginal Productivity Theory of Factor Demand Rule for employing factors MRP = MFC Marginal Factor = change in total (factor) cost Cost unit change in factor quantity MRP is a factor demand schedule consider the case of pure competition (product price is constant) LO. 9
Factor price (wage rate) The Perfectly Competitive Seller s Demand Curve Units of a factor Figure - Total product 8 8 8 Marginal product, MP Product price LO. $ 8 Total revenue $ D = MRP Marginal revenue product, MRP $ 8 Quantity of Labour
Factor price (wage rate) 8 8 - The Imperfectly Competitive Seller s Demand Curve D = MRP (perfect competition) D = MRP (imperfect competition) 8 Quantity of factor demanded The MRP curve of imperfect competitive producer (decreasing price) is less elastic than that of perfectly competitive producer (constant price) Figure - LO.
Marginal Productivity Theory of Factor Demand Market Demand for a Factor Sum of the individual demand (MRP) curves for all firms hiring that factor LO.
. Determinants of Factor Demand Changes in Product Demand Changes in Productivity Quantities of Other Factors Technological Progress Quality of the Variable Factor LO.
Determinants of Factor Demand Changes in the Prices of Other Factors Substitute Factors of Production Substitution Effect Output Effect Net Effect Complementary Factors of Production LO.
. Elasticity of Factor Demand Efd = % change in factor quantity % change in factor price What determines the elasticity of factor demand? LO.
Determinants of Efd Ease of Factor Substitutability Elasticity of product Demand Ratio of Factor Cost to Total Cost LO.
. Optimal Combinations of Factors The Least-Cost Rule: Marginal product Marginal product of labour (MPL ) Price of labour (P L of capital (MPC ) ) Price of capital (PC) LO.
Optimal Combinations of Factors The Profit Maximizing Rule: MRP L MRP C P L P C LO. 8
Table - Least-Cost and Profit-Maximizing Combination Q TP MP TR MRP 8 Labour (price = $8) Capital (price = $) $ 8 8 8 Q TP MP TR MRP 8 8 9 $ What is the least-cost combination of labour and capital to use in producing units firm s of output? profit? Will units of output maximize the $ 8 8 LO. 9
Table - Least-Cost and Profit-Maximizing Combination Q TP MP TR MRP 8 Labour (price = $8) Capital (price = $) $ 8 8 8 Q TP MP TR MRP 8 8 9 $ What is the least-cost combination of labour and capital to use in producing units firm s of output? profit? Will units of output maximize the $ 8 8 LO.
Table - Least-Cost and Profit-Maximizing Combination Q TP MP TR MRP 8 Labour (price = $8) Capital (price = $) $ 8 8 8 Q TP MP TR MRP 8 8 9 $ What is the least-cost combination of labour and capital to use in producing units firm s of output? profit? Will units of output maximize the $ 8 8 LO.
Marginal Productivity Theory of Income Distribution Income gets distributed according to contribution output Criticisms: Inequity Market imperfections LO.
The Last Word: Input Substitution: the Case of ABMs Input substitution Banks use ATMs instead of people Least-cost combination of resources ATMs debut about 8 years ago More than, ABMs in Canada 8, teller positions eliminated Former tellers find new jobs in other sectors Customer convenience Society wins Chapter
Chapter Summary. Factor Pricing and Demand MRP (cases of perfect and imperfect competition). Determinants of Factor Demand Change in demand Change in the productivity Change in price (substitution and price effect). Elasticity of Factor Demand. Optimal Combination of Factors Least-cost rule and profit-maximization rule Chapter