ECN 101 Chapter Notes - Chapter 14: Ceteris Paribus, Perfect Competition, Marginal Revenue Productivity Theory Of Wages
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Chapter 14
!1
The Demand for factors of production
Why factor pricing is important? -
1. Money - income determination - factor pricers are a major determinant of household income.
2. Cost Minimization - pf determines how much of each is employed as the firm tries to
minimize cost in order to max. profit
3. Resources Allocation - FP allocate inputs among industries and firms.
4. Policy Issues
Marginal productivity Theory of Factor Demand
Derived Demand
-the demand for a factor is derived from the demand for the products that the factor helps to
produce. more demand for a product the higher the demand for factors that of into
manufacturing it.
Marginal Revenue Product (MRP) - its the firms demand schedule for labour.; how much each
successive unit of a factor adds to total revenue.
because resources demand is derived from product demand, the strength of the demand
for any doctor of production will depend on:
1. Productivity - Productivity is the merging product. of the factor (when adding an additional
unit of output, marginal product)
2. Price of the good it helps to produce (marginal revenue product:
3. [Change in total revenue] / [Unit change in factor quantity]
Marginal Factor Cost -
what each additional; unit of a factor adds to the firm’s total (factor)cost -
[change in total (factor) cost] / [unit change in factor quantity]
MRP = MFC :rule for employing factors
Determinants of Factor Demand: Shift of Curve
1. Changes in product demand - increase in demand for the product the factor helps
to produce, increaser the demand for a factor.
2. Changes in Productivity - increase in productivity of factor increases demand for it
i.e. demand for labor
(i) Quantities of other factors - more technical progress in capital used with
labour, the marginal productivity of labour increases.
(ii) Technological advance - MP increases, can also lead to loose of jobs
(iii) Quality of the variable factor - if the “quality of labour” increases,
productivity rises.
“Winner-take-all-market” - when a firm earns an enormous amount of money, while vast
majority of the firms are getting a little money.
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Document Summary
The demand for a factor is derived from the demand for the products that the factor helps to produce. more demand for a product the higher the demand for factors that of into manufacturing it. Marginal revenue product (mrp) - its the rms demand schedule for labour. Marginal factor cost - what each additional; unit of a factor adds to the rm"s total (factor)cost - [change in total (factor) cost] / [unit change in factor quantity] Winner-take-all-market - when a rm earns an enormous amount of money, while vast majority of the rms are getting a little money. !2: changes in the prices of other factors - assume price of machinery falls, that happens to the demand for labour if the can be substitute. (i) substitute factors of production : Substitution effect - substitution of machinery for labour, therefore some labour displaced.