Download Firm - Course

The Firm in PC Labor Markets
Objective(s)
• 3. Students should be able to explain why a firm
hires labor until MFC=MRPL and identify this point
on a cost chart and the graph of a factor market.
• 5. Students should be able to graph the supply
and demand of perfectly competitive labor firms
and specifically recognize:
– that the demand curve is derived from MRPL.
– that the supply curve (MFC) is set by the market.
– that the intersection of MFC and MRPL represents the
profit maximization quantity of labor.
– that certain variables can cause shifts in the supply
and demand of labor firms.
A review…
• How many graphs are needed to show
changes to a PC firm that produces and
sells its goods in a PC Market?
• 2! One for the market and one for the firm.
• The firm is a “Price-Taker”.
PC Firm’s Take their Wage from
the PC Labor Market
PC LABOR MARKET
We are studying Perfectly
Competitive Labor Markets
PC Labor Markets
PC Product Markets
• Many Firms- No
Barriers to Entry
• Many Firms- No
Barriers to Entry
• Firms are Wage
Takers
• Firms are Price
Takers
• Firms are
DEMANDERS
• Firms are
SUPPLIERS
What is marginal cost?
• The cost of increasing output by one unit.
Marginal Factor Cost (MFC)
• The cost of each additional factor employed by a
firm. With labor, it is:
• Change in Total Factor Cost of Laborers
Change in Laborers
• This equals wage in the PC industry
So if this is my situation…
Laborers
Total Factor
Cost
1
20
2
40
3
60
4
80
Marginal
Factor
Cost
The firm is a “Wage-Taker”
The Wage in a PC Firm
• The Equilibrium
Wage in the PC
Labor Market
Sets the Wage
for the PC Firm
Wages
S= MFC
• Firms are “wagetakers”
• The Eq. Wage =
MFC = Supply
Quantity of Laborers for the firm
Recall: What is MRP?
MRP: Marginal Revenue
Product of Labor. What is it?
Marginal Revenue Product of Labor
(MRP)
MRP= MPL (Marginal Product of Labor)
X
P (Price of the Good)
The Firm’s Demand Curve &
The Market Demand for Laborers
• The market’s
demand for labor
is equal to all
firms in the
market’s demand
for labor.
Wages
•
D= MRP
• The firm hires
workers at a
wage that does
not exceed their
marginal revenue
product of labor.
Quantity of Laborers
If the Product Price is $2 and the Wage is $20
then how many workers should this PC Firm hire?
Explain.
Laborers Output
Marginal
Product of
Labor
Marginal
Revenue
Product
Wage=
MFC
1
15
15
$30
$20
2
29
14
$28
$20
3
42
13
$26
$20
4
50
8
$16
$20
5
55
5
$10
$20
Recall: Why is profit maximized
when MR=MC?
PC Firm
Monopoly
Supply and Demand for a Firm in a
PC Labor Market
• Demand is
equal to MRP
Wage
Add the MRP
curve
S=MfC
Eq.W
• You maximize
Profit/ Minimize
Costs where
MFC=MRP
D=MRp
Eq. Q
Quantity of Laborers
– Hire workers
until MFC=MRP
– Hire less if
MRP < MFC
– Hire more if
MRP > MFC
The Whole Thing Together
PC Labor Market
PC Firm in Labor Market
Compare and contrast PC Labor markets and firms to
PC Product market and firms.
Practice…
1. How many workers should this firm hire?
2. How do you know this?
Price= $10
Wage=$60
Labor
Units
Total
Output
1
5
2
20
3
30
4
35
5
35
Marginal
Product of
Labor
MRP
MFC