Resource Markets

Nipuni Abeysiriwardena
Factors of Production
• Labour - human resources
• Land
• Capital
• Entrepreneurship
 How to measure productivity
• How many units of inputs to be hired?
and profits
• Ex: Labour _ how many labourers firm should hire????
• MARGINAL ANALYSIS – additional unit – what will happen when you add one more unit ( Cost and
Benefits)
1. Firm want to maximize profits
Profit = Total revenue – total cost
Hiring decision based on hiring one more unit of labour
2. Marginal Benefit –
benefit you get by hiring one more labour
the amount of output added by one unit of labour in to total revenue
Marginal Revenue Product (MRP) = Increase in Total Revenue due to one more unit of labour (input)
3. Marginal Factor Cost (MFC) – amount of cost added by one more unit of labour to total cost
Increase in total cost due to one more unit of labour (input)

4. Profits goes up as long as,

MRP >= MFC

5. Firm will maximize profits,

MRP = MFC
Determining Marginal Benefit by Marginal
Revenue Product
• Price Takers – Perfectly competitive market
• Firms can increase the output, but sell at the same price
• Revenue = P*Quantity (Production/Output)
• Marginal Revenue Product = Price * MPP (Marginal Physical Product)

Marginal Physical product = how much the added input increases total physical output
How much is added to total production (total physical output) by an additional labour

Ex :

MRP derive the demand for labour Derived demand

Negative slope
Marginal Revenue Product
Units of 1 2 3 4 5 6 7
Input
Output 8 15 21 26 30 33 35
MPP 8
MRP = P*
MPP

Price is at $4
Determining Marginal Cost by Marginal
Factor Cost
• Firms employs only fraction of total labour force, so they are price takers in hiring
• MFC = Price of the Factor
• Labour’s MFC is it’s wages
• Demand for labour – firms
Efficiency
• Each firm will hire labour until;
• MFC = MRP
• Wages = MRP

• Supply of labour – individuals/people

• Higher the wages, more persons want to work
Labour Market Equilibrium
Question
Labour 1 2 3 4 5 6 7 8
Units
MPP 20 18 16 14 12 10 8 6

1. If the firm hires 4 labours, what is the total production?

2. If the wages is $12 and Price is $1, how many workers should the firm hire?
3. If W = $35 and P = $2 how many workers should the firm hire?
Labour Unions
Unions and Efficiency
• Unions are the only suppliers of labour to unionized employers.
• Unions also try to raise the wages using various actions.
• There are benefits of trade unions as well such as;
• Reducing employee Turnover – handling grievances
• Better training of workers
• Encouraging workers to invest in firms – invest in unique skills