Factor (Resource) Markets
I. Least Cost Rule for combining resources (labor
and capital).
A. Works exactly the same as utility
maximization. (Remember: How many pens and
how much pizza should Cindy buy?)
B. The last dollar spent on each resource
should get the firm the same amount of product.
What combinations of labor and capital will minimize costs?
Labor (Price = $8)
Capital (Price = $12)
Quantity
Total
Product
Marginal
Product
Marginal
Product
Per $
0
0
0
0
0
0
0
0
1
12
12
1.5
1
13
13
1.08
2
22
10
1.25
2
22
9
0.75
3
28
6
0.75
3
28
6
0.5
4
33
5
0.625
4
32
4
0.33
5
37
4
0.5
5
35
3
0.25
6
40
3
0.375
6
37
2
0.17
7
42
2
0.25
7
38
1
0.08
Quantity
Total
Product
Marginal
Product
Marginal
Product
Per $
What combination of labor and capital will minimize costs?
Labor (Price = $8)
Capital (Price = $12)
Quantity
Total
Product
Marginal
Product
Marginal
Product
Per $
0
0
0
0
0
0
0
0
1
12
12
1.5
1
13
13
1.08
2
22
10
1.25
2
22
9
0.75
3
28
6
0.75
3
28
6
0.5
4
33
5
0.625
4
32
4
0.33
5
37
4
0.5
5
35
3
0.25
6
40
3
0.375
6
37
2
0.17
7
42
2
0.25
7
38
1
0.08
Quantity
Total
Product
Marginal
Product
Marginal
Product
Per $
What combination of labor and capital will maximize profits?
The price of the product is $2.
Labor (Price = $8)
MFC
Capital (Price = $12)
MRP
Total
Marginal
Quantity Product Product
Marginal
Product
MFC
Quantity
Total
Product
0
0
0
0
MRP
0
0
0
0
1
12
12
8
24
1
13
13
12
26
2
22
10
8
20
2
22
9
12
18
3
28
6
8
12
3
28
6
12
12
4
33
5
8
10
4
32
4
12
8
5
37
4
8
8
5
35
3
12
6
6
40
3
8
6
6
37
2
12
4
7
42
2
8
4
7
38
1
12
2
What combination of labor and capital will maximize profits?
The price of the product is $2.
Labor (Price = $8)
MFC
Capital (Price = $12)
MRP
Total
Marginal
Quantity Product Product
Marginal
Product
MFC
Quantity
Total
Product
0
0
0
0
MRP
0
0
0
0
1
12
12
8
24
1
13
13
12
26
2
22
10
8
20
2
22
9
12
18
3
28
6
8
12
3
28
6
12
12
4
33
5
8
10
4
32
4
12
8
5
37
4
8
8
5
35
3
12
6
6
40
3
8
6
6
37
2
12
4
7
42
2
8
4
7
38
1
12
2
Profit Maximization: MRP = MFC (MRC)
MFC is less
than MRP
MFC is greater
than MRP
(MRP)
(MFC)
For a firm in a perfectly
competitive labor market, MFC
is horizontal.
MFC (MRC)
MFC (Marginal
Factor Cost) is the
cost of hiring more
labor.
MRP (Marginal
Revenue Product) is
the benefit of
hiring more labor.
MRP
III. Perfectly Competitive Labor Markets
A. Work exactly the same as competitive
product markets.
B. Firms are wage-takers. They can hire all the
workers they want at the market wage, but they can’t
hire any workers for less than that.
Wage rate
A firm in a perfectly competitive labor
market is a wage taker. What does this mean?
Wc
0
The firm has no control
over wages. It cannot
pay lower wages without
losing all of its
employees, and it can
hire all it wants at the
market price, so it has no
need to raise wages
s = MFC above that.
The supply curve, for the
individual firm is
d = MRP perfectly elastic.
Q
S
W1
Wage
Individual Firm
Wage
Industry
W1
D
Qi
Quantity of Labor
s = mfc
d = mrp
Qf
Quantity of Labor
III. Monopsonistic Labor Markets
A. Work very much like monopolies, but with
hiring labor instead of selling product.
B. One firm hires all or most of the workers in a
particular labor market.
C. Firms are wage-makers. They must pay
higher wages to employ additional workers.
A monopsonist is a wage maker.
Wage
S
W2
W1
0
Q1
What does this mean?
Because the firm is the
entire labor market, it
decides employment
levels for the entire
market.
It then sets wage based
on the number of
workers it wants to
employ.
The labor supply curve,
for the monoposonist, is
upward sloping.
Q2 Quantity
Wage
For a monopsony, marginal factor cost (MFC
or MRC) is always higher than wage.
MFC
Supply
Wc
Wm
D = MRP
0
Qm Qc
Quantity
Quantity
of
Workers
Wage
Rate
Total
Factor
Cost
Marginal
Factor
Cost
1
$10
$10
$10
2
$11
$22
$12
3
$12
$36
$14
4
$13
$52
$16
5
$14
$70
$18
IV. Practice Problem (Hardest Multiple Choice)
Let W denote the nominal wage, P the output
price, and MPL the marginal product of labor. Which
of the following relationships correctly estimates the
marginal cost (MC) of production for a perfectly
competitive firm in the short run?
(A) MC = P/MPL
(B) MC = P X MPL
(C) MC = W X MPL
(D) MC = W/MPL
(E) MC = MPL/W
IV. Practice Problem (Hardest Multiple Choice)
It’s actually simple if you just think about it.
If you hired the last worker at $30/hour and she
could produce 5 baseballs per hour, what would be
your marginal cost of baseballs at that level of
production?
$30/5 baseballs = $6
Marginal cost = Wage ÷ Marginal Product
So here’s the multiple choice:
Let W denote the nominal wage, P the output price,
and MPL the marginal product of labor. Which of the
following relationships correctly estimates the
marginal cost (MC) of production for a perfectly
competitive firm in the short run?
(A) MC = P/MPL
(B) MC = P X MPL
(C) MC = W X MPL
(D) MC = W/MPL
(E) MC = MPL/W
Marginal cost = Wage ÷ Marginal Product
And if this were a perfectly competitive industry in
long-run equilibrium, we could also say that:
Price = wage/marginal product or
ATC = wage/marginal product