AP EconomicsDecember 8, 2014

1. Review Unit 3 Exam: Theory of the Firm

2. Begin Unit 4: Factor Markets

3. Unit 4 Exam NEW DATE: Monday, December 22 and Tuesday, December 23.

Factor/Resource Market:

Firm is a Seller and a Buyer

The Demand for Resources

• Factor of production is something (an 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 helps produce.

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 using:• MRP=MRC Rule

MRC in a 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 a Perfect Competitor in the Labor Market (Firm is a Wage-Taker)

Price of Labor

Labor

PL S

AP EconomicsDecember 9, 2014

1. Continue Lesson 4-1: MRP as Resource Demand

2. HW: Activity 4-1

3. Return Work

Re

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e W

ag

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Quantity of Resource Demanded

MRP as Resource DemandPerfectly Competitive Product Market

(1)Units of

Resource

(2)Total Product

(Output)

(3)Marginal

Product (MP)

(4)Product

Price

(5)Total Revenue,

(2) X (4)

(6)Marginal Revenue

Product (MRP)

01234567

07

131822252728

7654321

$22222222

$ 014263644505456

$141210

8642

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1 2 3 4 5 6 7

0

-2

2

4

6

8

10

12

14

16

$18

D=MRP

PurelyCompetitiveFirm’sDemand fora Resource

LO1 12-8

01234567

07

131822252728

7654321

$2.802.602.402.202.001.871.751.65

$ 0.0018.2031.2039.6044.0046.2547.2546.20

$18.2013.008.404.402.251.00

-1.05

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1 2 3 4 5 6 70

-2

2

4

6

8

10

12

14

16

$18

Re

so

urc

e W

ag

e(W

ag

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ate

)

Quantity of Resource Demanded

D=MRP(Pure Competition)

ImperfectlyCompetitiveFirm’sDemand forA Resource

D=MRP(ImperfectCompetition)

MRP as Resource DemandImperfectly Competitive

(1)Units of

Resource

(2)Total Product

(Output)

(3)Marginal

Product (MP)

(4)Product

Price

(5)Total Revenue,

(2) X (4)

(6)Marginal Revenue

Product (MRP)

LO1 12-9

Downward sloping at steeper rate due to(1) Diminishing Marginal

Productivity(2) Product price drop

AP EconomicsDecember 10, 2014

1. Review Activity 4-1

2. Lesson 4-2: Optimal Combination of Resources

3. HW: Activities 4-2, 4-3, 4-4

Lesson 4-2The Optimal Combination of Resources

• In our Yo-Yo activity, 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…

• If a firm wants to produce the most output on a given budget…or…if it wants to produce a given level of output at lowest cost, it uses…

The Least Cost Combination

Marginal ProductOf Labor (MPL)

Price of Labor (PL)(MRCL)

Marginal ProductOf Capital (MPK)

Price of Capital (PK)(MRCK)

=

LO3 12-12

• Least Cost Rule is necessary but not efficient…

Profit Maximizing Rule

MRPL

PL

(MRCL)

MRPK

PK

(MRCK)

= = 1

LO3 12-13

Capital MP of Capital Labor MP of Labor

0 ---  0  ---1 10 1 282 9 2 303 8 3 244 7 4 205 6 5 166 5 6 127 4 7 88 3 8 4

Suppose a firm's marginal product of capital and marginal product of labor schedules are as shown in the table below. The firm hires both capital and labor competitively for $4 and $8, respectively. Its output is sold in a competitive market for $.50 per unit.1.Suppose the firm is currently using 4 units of capital and 4 units of labor. Is the corresponding output being produced at least cost? How do you know?2.What combination of labor and capital should the firm use to maximize its profit?