Introduction to Factor Markets
Introduced| English | Meaning |
|---|---|
| factor market/ˈfæktə ˈmɑːkɪt/ | A market in which inputs such as labour, land or capital services are bought and sold. |
| factors of production/ˈfæktəz ɒv prəˈdʌkʃn/ | The inputs used to produce goods and services: land, labour, capital and enterprise. |
| derived demand/dɪˈraɪvd dɪˈmænd/ | Demand for an input that arises from demand for the goods or services it helps produce. |
| marginal revenue product/ˈmɑːdʒɪnl ˈrevənjuː ˈprɒdʌkt/ | The additional revenue generated by employing one more unit of a factor of production. |
| marginal factor cost/ˈmɑːdʒɪnl ˈfæktə kɒst/ | The additional total cost of employing one more unit of an input. |
| hiring rule/ˈhaɪərɪŋ ruːl/ | Choose the quantity of an input that maximises profit; at an interior optimum, its marginal revenue product equals its marginal resource cost. |
| factor demand curve/ˈfæktə dɪˈmænd kɜːv/ | A curve showing how much of an input a firm or market demands at each input price, other relevant conditions held constant. |
Now the firm is the buyer
- Until now, firms have been sellers of goods.
- But to make those goods, a firm must first buy workers, land, and machines.
- In a factor market 要素市场 the firm is on the buying side.
- Here it hires the factors of production 生产要素 it needs.
Demand for a factor is derived
- No one wants a worker for their own sake — only for the goods that worker helps make.
- So factor demand is a derived demand 派生需求: it comes from the value of the product.
- When the product becomes more valuable, the demand for the workers who make it rises.
Factor demand is a "derived demand" because it comes from:
Difficulty 1/5 · 100 coins + a small bonus on first completion today
Firms want a factor only for the goods it produces, so demand is derived from the product.
Hire until MRP = MFC
- The marginal revenue product 边际收益产品 (MRP) is the extra revenue from one more unit of the factor: $MRP = MP \times P$.
- The marginal factor cost 边际要素成本 (MFC) is the extra cost of hiring one more unit.
- The hiring rule 雇佣法则: keep hiring until $MRP = MFC$.
Hire, or don't?
A firm hires a worker only if the extra revenue (MRP) is at least the extra cost (the wage). Hire while MRP ≥ wage; stop when MRP falls below it.
For a competitive seller, MRP equals marginal product times the product ______.
Difficulty 1/5 · 100 coins + a small bonus on first completion today
MRP = MP × P — the extra output valued at the price it sells for.
A worker adds 8 loaves a day, and each loaf sells for 5. What is this worker's marginal revenue product?
Difficulty 2/5 · 140 coins + a small bonus on first completion today
MRP = MP × P = 8 × 5 = 40.
A firm keeps hiring workers until:
Difficulty 1/5 · 100 coins + a small bonus on first completion today
At MRP = MFC the last worker just pays for themselves; beyond it they cost more than they bring.
A sixth worker adds revenue (MRP) of 30, but the wage is 40. The firm should:
Difficulty 1/5 · 100 coins + a small bonus on first completion today
MRP (30) is below MFC (40), so hiring that worker would shrink profit.
The MRP curve is factor demand
- As more workers are added, marginal product falls (diminishing returns).
- So the MRP curve slopes downward — and that curve is the firm's factor demand curve 要素需求曲线.
The MRP curve slopes downward because marginal product falls as more workers are added.
Difficulty 1/5 · 100 coins + a small bonus on first completion today
Diminishing marginal product makes each extra worker's MRP smaller — a downward factor demand.
In a factor market the firm is a buyer, and its demand is derived from the product. Hire until $MRP = MFC$, where MRP $= MP \times P$. Because marginal product falls, the downward MRP curve is the firm's factor demand.
Write from a marginal revenue product of 42
- A worker packs 6 boxes a day. Each box sells for 7 dollars.
- Find the worker's marginal revenue product.
A worker adds 6 boxes a day and each box sells for 7 dollars. What is the worker's marginal revenue product?
6 times 7 is 42.
What is the marginal revenue product?
Difficulty 1/5 · 100 coins + a small bonus on first completion today
6 times 7 is 42 dollars. Other options — 40 dollars (the lesson figure); 6 boxes (the extra output).