# FACTORS OF PRODUCTION MARKET

```INPUT MARKET
PRICING OF FACTORS OF PRODUCTION
The demand for inputs
 the firm’s demand for
labor and other inputs is
derived indirectly from
the consumer demand
for its final products
The supply of inputs
Basically, there are two
ways, how the
individual supply of
labor can be perceived:
 supply of one worker,
 supply to one firm.
INPUT DEMAND OF PROFIT-MAXIMIZING FIRMS
The input demand depends on:
 the productivity of the input, how high return is from
that input, what price for can be sold the product
 the cost expends on the input.
Marginal Revenue Product
 Under perfect competition on product market – the
marginal product that the worker brings in (MPL) can
all be sold at the competitive output price (P) 
MRPL = MPL x PA
 Under imperfect competition on product market –
hence with MR &lt; P, each unit of labor’s marginal
product will be worth the MR to the firm 
MRPL = MPL x MR
Marginal Revenue Product
EUR
MRP = MP . P
F (L)
Marginal Factor Costs – MFC
input
EUR
(PF, w ..)
 „price-taker“ firm hires that
small part of the input, that
can’t affect its price 
factor equals to the price:
MFC = PF
MFC =
AFC
F(L)
Equilibrium of the firm
 to maximize the profit, input
marginal revenue product of
input falls to equal its marginal
input cost
MRP = MFC
EUR
(PF, w ..)
MFC =
AFC


MRP &gt; MFC – an additional
unit of input brings in more,
than it costs therefore,
extend the production,
MRP &lt; MFC – firm will hire
less of given input and
reduce the production.
MRP = D
F*
F(L)
LABOR MARKET
 the change of wage rate can have two effects on the decision
between work and free time and induces that the supply curve
may slope positively or negatively:

substitution effect – higher wage rate can lead to
substitution of free time for work  to increase in quantity of
labor supplied,

income effect – higher wage rate increases the real income
(assuming, that the prices of goods and services stay
constant)  leads to decrease in quantity of labor supplied.
 supply curve is backward-bending as a result of these effects
Individual Supply of Labor
w
IE
SE
L
LABOR MARKET IN SITUATION OF
IMPERFECT COMPETITION
Monopoly advantage on demand or supply side:
1. monopsony – monopoly power is on the side of
2. labor unions – existence of monopoly power on the
side of seller on the labor market.
FOUR WAYS LABOR UNIONS AFFECT THE
WAGE RATE
 a) Unions can reduce the supply of labor - an effect is leftward shift of
supply curve, which lower total employment and raise wages in this
labor market
 b) use their collective bargaining power to raise standard wage rates
directly - as a result, some of the workers are excluded from jobs as if
the union had directly limited entry
 c) increasing the demand for labor (for union labor) – shift in the
demand for unionized labor will shift up both wage rates and
employment
combating monopsony power of business – if unions represent the
monopoly on the demand side, if there is a single buyer of a labor (in a
region or sector) it is called monopsonist
 d)
1. Graphically depict:
a)
Impact of decline in marginal product of labor on the demand for labor,
b)
Impact of decline in marginal product of capital on the demand for labor.
2. Explain and graphically depict the impact on wages level of:
a)
Free migration of inhabitants among different regions inside the country,
b)
Imposition of import quotas on products.
3. Graphically depict and explain decision of firm about the amount of workers hired,
knowing:
a)
The marginal product of labor has declined ceteris paribus,
b)
The real wages has increased ceteris paribus.
```