AP Economics
December 9, 2015
1. Begin Unit 4: Factor (Resource) Market 10-19%
of AP Micro Exam
2. Lesson 4-1: How Resource Prices are
Determined
3. HW: Activity 4-1
4. Unit 4 Exam NEW DATE: Tuesday, December 22
and Wednesday, December 23.
5. Vocab is Ch. 12-14
6. Unit 3 Test Scores
7. If you missed any part of the test, you NEED to
stay after Thursday and take the exam.
Factor/Resource
Market:
Firm is a Seller and a
Buyer
The Demand for Resources
• Factor of production is something
(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 produces.
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
EMPLOYING AMOUNT OF RESOURCES SO
THAT: MRP=MRC!
MRC in:
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 IN
Perfect Competition in the Labor Market
Firm is a Wage-Taker
Price of
Labor
PL
S
Labor
Warm-Up Review
Quantity of Labor
Total Product
(Pizzas)
0
0
1
5
2
12
3
16
4
17
5
15
• Assume labor in the Factor
Market is perfectly
competitive and assume
pizzas are sold in a perfectly
competitive product market.
1. How many workers should
the pizza making firm hire if
Wage is $20 and pizza sells
for $10?
2. What will be the total labor
cost?
3. What will be the firm’s
profit?
Warm Up Answers
Q
TP
MP
TR
MRP
(MP x Price)
MRC
0
0
-
-
-
-
1
5
5
50
50
20
2
12
7
120
70
20
3
16
4
160
40
20
4
17
1
170
10
20
5
15
-2
150
-20
20
Total labor cost is 3 x $20 = $60
Total revenue is 16 x $10 = $160
Total Profit is $100
Lesson 4-2:
Optimal Combination of Resources
• So far, 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
specific level of output at lowest cost to maximize
profit, it uses the Least Cost Combination.
Economic Efficiency: Firm should get SAME
EXTRA OUTPUT ON LAST $ SPENT ON EACH
RESOURCE
Marginal Product
Of Capital (MPK)
Marginal Product
Of Labor (MPL)
=
Price of Labor (PL)
(MRCL)
LO3
Price of Capital (PK)
(MRCK)
12-10
Least Cost Practice
Given the price of labor is $10 and the price of capital is $20,
determine the cost minimizing combination.
L
TP
K
TP
1
12
1
22
2
22
2
34
3
30
3
44
4
36
4
52
5
40
5
58
What will be the Total Production?
What will be the Total Cost?
Least Cost Practice
Given the price of labor is $20 and the price of capital is $40,
determine the cost minimizing combination.
L
TP
MP
MPL/PL
K
TP
MP
MPK/PK
1
12
12
0.6
1
22
22
0.55
2
22
10
0.5
2
34
12
0.3
3
30
8
0.4
3
44
10
0.25
4
36
6
0.3
4
52
8
.02
5
40
4
.02
5
58
6
0.15
What will be the Total Production?
70 Units
What will be the Total Cost?
(4 x $20 = $80) + (2 x $40 = $80) = $160
Given the price of labor is $10 and the price of capital is $20, determine
the cost minimizing combination of workers and capital. Assume the
product being produced sells for $10 in a perfectly competitive product
market and all inputs are operating in perfectly competitive product
market.
1.
2.
3.
4.
5.
L
TP
K
TP
1
7
1
17
2
16
2
40
3
24
3
56
4
30
4
69
5
35
5
80
What is the cost-minimizing quantity of resources?
What will be the Total Production?
What will be the Total Cost?
What will be the Total Revenue?
What will be the Total Profit?
Given the price of labor is $10 and the price of capital is $20, determine the cost
minimizing combination of workers and capital. Assume the product being
produced sells for $2 in a perfectly competitive product market and all inputs are
operating in perfectly competitive product market.
L
TP
MP
MPL/PL
K
TP
MP
MPK/PK
1
7
7
0.7
1
17
17
0.85
2
16
9
0.9
2
40
22
1.1
3
24
8
0.8
3
56
16
0.8
4
30
6
0.6
4
69
13
0.65
5
35
5
0.5
5
80
11
0.55
What will be the Total Production? 24 + 56 =80
What will be the Total Cost? $90
What will be the Total Revenue? $160
What will be the Total Profit? $70
Profit Maximizing Rule
• Least Cost Rule is necessary but
not efficient…
MRPL
MRPK
= 1
=
LO3
PL
PK
(MRCL)
(MRCK)
12-15
Profit Maximizing Practice
Given an output price of $3 per unit, labor cost of $24 per unit and capital
cost of $30 per unit, determine the profit maximizing combination of
resources and the respective output level, revenue, cost, and profit.
L
TPL
MPL
MRPL
MRPL/MRCL
K
TPK
MP MRPK MRPK/MRCK
K
0
0
0
1
12
1
22
2
22
2
36
3
30
3
46
4
36
4
54
5
40
5
58
Profit Maximizing Practice
Given an output price of $3 per unit, labor cost of $24 per unit and capital
cost of $30 per unit, determine the profit maximizing combination of
resources and the respective output level and profit.
L
TPL
MPL
MRPL
MRPL/MRCL
K
TPK
MPK
MRP MRPK/MRC
K
K
0
-
-
-
-
0
-
-
-
-
1
12
12
36
1.5
1
22
22
66
2.2
2
22
10
30
1.25
2
36
14
42
1.4
3
30
8
24
1
3
46
10
30
1
4
36
6
18
0.75
4
54
8
24
0.8
5
40
4
12
0.5
5
58
4
12
0.4
Total Output Level = 30 + 46 = 76
Total Revenue = $228
Total Cost = (3 x 24) + (3 x 30) = $162
Total Profit = $228 - $162 = $66