Perfectly Competitive 1 - Output & Labor
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mjmfoodie - Factor Market - Perfectly Competitive Factor and Output Markets - video
Perfectly Competitive Labor Market
- (wage takers) - hire as many workers @ the equilibrium wage rate.
- Market price is the wage rate.
Derived Demand - demand for a resource, depends on other factors:
- Price of the good the resource is used for.
- Productivity of the resource
Input - (Labor) - is effected by the Law of Diminishing Marginal Returns
- as more labor is added to a fixed amount of capital, output eventually decreases at an increasing rate.
- demand for labor is inversely related to price
- firms will only hire more labor if the wage rate falls
MRP (Marginal Revenue Product)
MRP is change in the firms total revenue resulting from the employment of one additional worker. It can be measured by the Marginal Physical Product of labor multiplied by the price of the good being produced.
Reffonomics on MRP=MRC
MRP is (revenue attributed to the last worker hired)
The MRP curve shows/ illustrates the firms demand for labor.
MRC (Marginal Revenue Cost)
A firm faces a downward sloping demand for labor curve due to the decreasing productivity of labor in the short-run.
In a Perfectly Competitive Market, MRC = the Wage Rate, A wage taker is a firm that can hire as many workers as it wants at the market wage rate. Te cost of each additional worker, therfore, is simply the wage the firm must pay that worker.
Notice, that the wage rate for the firm is its supply curve and that it is perfectly elastic in that they can hire as many workers as they want at that prevailing wage.
Profit Max = (MRP = MRC)
If the cost of hiring an additional worker (MRC) is more than the benefit of hiring the worker (MRP) then the worker should not be hired. Conversely, if the benefit of hiring the worker (MRP) is hirer than the cost of hiring the next worker (MRC) then the worker should be hired.
A Perfectly Competitive employer will want to hire workers until the MRP of the last worker equals the market wage rate.
Examples:
2008B AP Microeconomics Exam
Make a chart:
a) after which worker do DMR set in,, by looking at MP we can see that the second worker produces an additional 16 units, an increase from the first workers output. Yet the third worker produces only 10 additional units a decrease from the 2nd workers additional output, thus diminishing marginal returns have set in after hiring the 2nd worker. Answer: after the 2nd worker
b) Calculate the Marginal Physical Product of the fifth worker. MPP is the change in the quantity of the total physical product produced divided by the change in input (labor/additional worker). Also known here as Marginal Product. The change in the fifth workers output was 44 to 49 units produced or 5 units were produced by hiring worker #5. Answer: 5 units
c) Calculate the MRP of the 3rd worker - done. Look at the chart - Answer: 3rd worker MRP = 20
d) How many workers will GW hire to Max Profit. Remember, max profit is where MRP = MRC, so looking down the chart the 5th worker's MRP is $10 while his MRC is $15.. we are loosing money on hiring the 5th worker. SO we look at worker 4, his MRP is $16 while his MRC (wage rate) is $15,, we are making a $1 on hiring him. As you can's hire a part of a worker,, we should consider profit max is at hiring of worker #4. Answer: hiring of worker #4
e) GW has fixed costs of $20, what are the Short-run profits of hiring 2 workers. Dirty bastards, they are trying to see if we know that the formula for profits is TR (total revenue) minus TC (total costs)... Knowing that , TC is a combination of fixed & variable, fixed being the $20 and variable being the wage rate of $15 per worker. So $20 plus $30 (15 x 2) = $50 dollars (TRC) - and TRP is the amount produced by the two workers (TP = 26 units times the price of the units) is $52 or you can simply add the MRP of worker 1 & 2 (20 + 32) = $52. So $52(TR) - $50(TC) = Profit of $2 dollars.
f) price of hats increases what happens to the number of workers in the short-run. Look at the chart below,,,, double the price and what happens to MRP,,, it increases.
Now, at what point with the new price would MRP = MRC,,, at worker #5,, worker #6 is still to expensive, but with the additional revenue from the rise in the price of the good (hats,,not labor) we would hire an additional worker,,, it works the same if productivity had increased. In the short run we would hire additional workers.
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