AP Economics
December 8, 2014
1. Review Unit 3 Exam: Theory of the Firm
2. Begin Unit 4: Factor Markets
3. Unit 4 Exam NEW DATE: Monday, December 22 and
Tuesday, December 23.
Factor/Resource
Market:
Firm is a Seller and a
Buyer
The Demand for Resources
• Factor of production is something (an
input) that is used to produce output.
• Examples: buildings, machinery, land, labor,
raw materials
• Derived Demand: The demand for an input
is derived from the demand for the output
that the input helps produce.
MRP & MRC
• Marginal Revenue Product (MRP): change in
Total Revenue that results from the
employment of an additional worker.
• MRP = DTR / DL
• Marginal Resource Cost (MRC): change in
Total Cost that results from employment of an
additional worker.
• MRC = DTC / DL
• A firm maximizes its total profit by using:
• MRP=MRC Rule
MRC in a Perfectly Competitive Labor
Market
• Each time a firm hires another
worker, its cost increases by the
price of the labor (PL)
• For a firm in a perfectly competitive
labor market, MRC = PL (MRC=Wage)
• (If a firm is not in a perfectly competitive
labor market, this is not true.)
The Supply Curve of Labor to a Firm that is a
Perfect Competitor in the Labor Market
(Firm is a Wage-Taker)
Price of
Labor
PL
S
Labor
AP Economics
December 9, 2014
1. Continue Lesson 4-1: MRP as Resource Demand
2. HW: Activity 4-1
3. Return Work
MRP as Resource Demand
Perfectly Competitive Product Market
(1)
(2)
Units of Total Product
Resource
(Output)
0
1
2
3
4
5
6
7
(3)
Marginal
Product (MP)
(4)
Product
Price
7
6
5
4
3
2
1
$2
2
2
2
2
2
2
2
0]
7]
13 ]
18 ]
22 ]
25 ]
27
]
28
(5)
Total Revenue,
(2) X (4)
$0
14
26
36
44
50
54
56
]
]
]
]
]
]
]
(6)
Marginal Revenue
Product (MRP)
$14
12
10
8
6
4
2
$18
Purely
Competitive
Firm’s
Demand for
a Resource
Resource Wage
(Wage Rate)
16
14
12
10
8
6
4
D=MRP
2
0
-2
1
2
3
4
5
6
7
Quantity of Resource Demanded
LO1
12-8
MRP as Resource Demand
Imperfectly Competitive
(1)
(2)
Units of Total Product
Resource
(Output)
0
1
2
3
4
5
6
7
(3)
Marginal
Product (MP)
0]
7]
13 ]
18 ]
22 ]
25 ]
27
]
28
(4)
Product
Price
(5)
Total Revenue,
(2) X (4)
$2.80
2.60
2.40
2.20
2.00
1.87
1.75
1.65
7
6
5
4
3
2
1
$ 0.00
18.20
31.20
39.60
44.00
46.25
47.25
46.20
]
]
]
]
]
]
]
(6)
Marginal Revenue
Product (MRP)
$18.20
13.00
8.40
4.40
2.25
1.00
-1.05
$18
Imperfectly
Competitive
Firm’s
Demand for
A Resource
Resource Wage
(Wage Rate)
16
14
D=MRP
(Pure Competition)
12
10
8
6
4
2
0
D=MRP
(Imperfect
Competition)
1
2
3
4
5
6
7
-2
Downward sloping at
steeper rate due to
(1) Diminishing Marginal
Productivity
(2) Product price drop
Quantity of Resource Demanded
LO1
12-9
AP Economics
December 10, 2014
1. Review Activity 4-1
2. Lesson 4-2: Optimal Combination of Resources
3. HW: Activities 4-2, 4-3, 4-4
Lesson 4-2
The Optimal Combination of Resources
• In our Yo-Yo activity, we assumed the firm
was operating in the Short Run with fixed
capital and labor as its variable resource.
• Long Run: Firm can change its capital (K)
and it labor (L)
• Q: What combination of L & K should the
firm employ?
• We can Minimize Cost or Maximize Profit…
The Least Cost Combination
• If a firm wants to produce the most
output on a given budget…or…if it
wants to produce a given level of
output at lowest cost, it uses…
Marginal Product
Of Capital (MPK)
Marginal Product
Of Labor (MPL)
=
Price of Labor (PL)
(MRCL)
LO3
Price of Capital (PK)
(MRCK)
12-12
Profit Maximizing Rule
• Least Cost Rule is necessary but
not efficient…
MRPL
MRPK
= 1
=
LO3
PL
PK
(MRCL)
(MRCK)
12-13
Suppose a firm's marginal product of capital and marginal product of labor
schedules are as shown in the table below. The firm hires both capital and
labor competitively for $4 and $8, respectively. Its output is sold in a
competitive market for $.50 per unit.
1.Suppose the firm is currently using 4 units of capital and 4 units of labor. Is
the corresponding output being produced at least cost? How do you know?
2.What combination of labor and capital should the firm use to maximize its
profit?
Capital
MP of Capital
Labor
MP of Labor
0
1
2
3
4
5
6
7
--10
9
8
7
6
5
4
0
1
2
3
4
5
6
7
--28
30
24
20
16
12
8