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Markets for Factors of Production

Markets for Factors of Production. Factors of Production. Inputs used to produce goods & services Different from markets for goods & services in that it is a derived demand – its demand is derived from its decision to supply a good in another market. Demand for Labor.

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Markets for Factors of Production

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  1. Markets for Factors of Production

  2. Factors of Production • Inputs used to produce goods & services • Different from markets for goods & services in that it is a derived demand – its demand is derived from its decision to supply a good in another market

  3. Demand for Labor • Households are suppliers while firms are the demanders • Wage earned by workers is determined by the supply & demand for workers

  4. Competitive Profit-Maximizing Firm • Assume firm is competitive in the market for its good/service and in the market for workers that produce the good/service • Also, assume the firm is profit maximizing (TR – TC)

  5. Production Function & Marginal Product of Labor • How does the number of workers hired impact the amount of output we can produce? • Production Function – relationship between quantity of inputs used and the quantity of output produced • Marginal Product of Labor – increase in amount of output from hiring one additional worker

  6. Diminishing Marginal Product • As the number of workers increases, the marginal product of labor decreases

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