Introduction to Factor Markets
| English | Chinese | Pinyin |
|---|---|---|
| factor market | 要素市场 | yào sù shì chǎng |
| factors of production | 生产要素 | shēng chǎn yào sù |
| derived demand | 派生需求 | pài shēng xū qiú |
| marginal revenue product | 边际收益产品 | biān jì shōu yì chǎn pǐn |
| marginal factor cost | 边际要素成本 | biān jì yào sù chéng běn |
| hiring rule | 雇佣法则 | gù yōng fǎ zé |
| factor demand curve | 要素需求曲线 | yào sù xū qiú qū xiàn |
Now the firm is the buyer
- Until now, firms have been sellers of goods.
- But to make those goods, a firm must first buy workers, land, and machines.
- In a factor market 要素市场 the firm is on the buying side.
- Here it hires the factors of production 生产要素 it needs.
Demand for a factor is derived
- No one wants a worker for their own sake — only for the goods that worker helps make.
- So factor demand is a derived demand 派生需求: it comes from the value of the product.
- When the product becomes more valuable, the demand for the workers who make it rises.
Factor demand is a "derived demand" because it comes from:
Firms want a factor only for the goods it produces, so demand is derived from the product.
Hire until MRP = MFC
- The marginal revenue product 边际收益产品 (MRP) is the extra revenue from one more unit of the factor: $MRP = MP \times P$.
- The marginal factor cost 边际要素成本 (MFC) is the extra cost of hiring one more unit.
- The hiring rule 雇佣法则: keep hiring until $MRP = MFC$.
Hire, or don't?
A firm hires a worker only if the extra revenue (MRP) is at least the extra cost (the wage). Hire while MRP ≥ wage; stop when MRP falls below it.
For a competitive seller, MRP equals marginal product times the product ______.
MRP = MP × P — the extra output valued at the price it sells for.
A worker adds 8 loaves a day, and each loaf sells for 5. What is this worker's marginal revenue product?
MRP = MP × P = 8 × 5 = 40.
A firm keeps hiring workers until:
At MRP = MFC the last worker just pays for themselves; beyond it they cost more than they bring.
A sixth worker adds revenue (MRP) of 30, but the wage is 40. The firm should:
MRP (30) is below MFC (40), so hiring that worker would shrink profit.
The MRP curve is factor demand
- As more workers are added, marginal product falls (diminishing returns).
- So the MRP curve slopes downward — and that curve is the firm's factor demand curve 要素需求曲线.
The MRP curve slopes downward because marginal product falls as more workers are added.
Diminishing marginal product makes each extra worker's MRP smaller — a downward factor demand.
In a factor market the firm is a buyer, and its demand is derived from the product. Hire until $MRP = MFC$, where MRP $= MP \times P$. Because marginal product falls, the downward MRP curve is the firm's factor demand.