11.3. Profit maximization when using an economic resource
Let's consider a certain firm "Orion", which produces goods X using resource A. As it is established, acting in any market structure, the firm maximizes profit by releasing such a volume of production at which its marginal revenue equals marginal cost: MC = MR. Since Orion is producing product X using resource A, it is logical to assume that the firm will hire this resource until the marginal revenue received by adding an additional unit of the resource equals the marginal cost associated with hiring this unit of resource . Let's pay attention to the following: the categories of marginal revenue (MR) and marginal cost (MC) were defined as changes, respectively, in total revenue (TR) and total cost (TC) associated with the production and sale of an additional unit of goods. Since we are interested in the change in TR and TC associated with hiring an additional unit of resource, we need to introduce two new terms:
monetary marginal product (MRP)- change in the total revenue of firms due to the sale of units of goods produced using an additional unit of the resource:
marginal resource cost (MRC)- change in the total production costs associated with the attraction of an additional unit of the resource:
It can be proved that the condition for profit maximization by a firm is the use of such an amount of a resource that satisfies the condition:
If the firm is not able to influence the prices of resources, i.e. buys resources in a perfectly competitive factor market, then the MRC values will be the same for all hired units of the resource and will amount to the price of a unit of the resource P a . Profit maximization in this case is achieved if P a = MRP.
This means that at any price of the resource P a, the firm can determine the amount of the resource used, i.e. QD of the resource under which the condition is fulfilled: P a = MRP. Then the firm can find a correspondence between the price of the resource P a and QD of the resource or determine the demand for the resource. The resource demand curve is the MRP curve and the supply curve is the MRC curve.
In the long run, when all resources are variable, by producing any amount of output using several resources, say A and B (for example, labor and capital), the firm can minimize the cost per unit of output if the condition
where MPC and MPL are the marginal products of capital and labor;
PC and PL are unit prices of capital and labor.
Equality (8) allows you to find the ratio of resources that provide the company with minimal costs for a given volume of output, but it does not guarantee that in this case the company receives the maximum possible profit. It was proved above that using one resource, say A, the firm maximizes profit when the value of the marginal product in monetary terms is equal to the marginal cost of the resource:
Using only two resources, for example, labor and capital, the firm maximizes profit when a given rule is satisfied for each resource, i.e. MRP L=MRC L and MRP C = MRC C . Then, in a generalized form, the profit maximization condition when using two resources can be represented as:
If the firm is not able to influence the prices of resources, then MRC equals the price of the resource and equality (9) takes the form:
Note that, in contrast to equality (8), where a proportional ratio of MP and P is assumed (i.e., the firm can minimize costs if MP L / P L = MP C / P C = 3), the profit maximization condition means that the value of the MRP of the resource is equal to the marginal cost of the resource (resource price) and MRP L / P L =MRP C / P C = 1.
(Materials are given on the basis of: V.F. Maksimova, L.V. Goryainova. Microeconomics. Educational and methodological complex. - M.: Publishing Center of the EAOI, 2008. ISBN 978-5-374-00064-1)
A F E N I I (marginal revenue product, MRP) - additional
proceeds from the sale of additional volume of products received
when resource usage increases per unit (279)
ENTREPRENEURSHIP, ENTREPRENEURSHIP
ABILITY (entrepreneurial ability), CONTROL (managerial
skills)- the ability to rationally and most effectively
combine (use) resources for the production of economic
REPRESENTATIVE DEMOCRACY (representative democracy)
political system in which citizens
periodically elect representatives to elected bodies of power.
PROFIT (profit) - is defined as the difference between the total
revenue (total revenue) and total costs (total
cost): 7i = TR - TS. (192)
PROBLEM (from the Greek "task", "task") - clearly articulated
a question or set of questions that arose in the process
knowledge. (eighteen)
THE PROBLEM OF THE FREE RIDER, THE "HARE" (free rider problem)
The problem with consumer desire
to do without extra payments, having received benefits from a purely public
goods (which are provided to all consumers regardless
whether they pay for it or not). (431)
"FAILS" (FIASCO) OF STATES (GOVERNMENTS)
(government failures)- cases when the state (government)
unable to ensure efficient distribution and
use of public resources (464)
"FAILS" (FIASCO) OF THE MARKET (market failures) - situations
when the mechanism of competitive markets does not lead to
to maximize social utility. (432)
DERIVATED DEMAND (derived demand) - resource demand,
depending on the demand for final products produced
based on these resources (279)
PRODUCTION FUNCTION (production function)
firm producing a certain product Q - shows the maxi-
548 Concise Dictionary economic terms
low possible output this product using
all possible combinations of factors of production: Q=f(F1,F2,...Fn).
A simplified version of the production function - dependency
goods Q from labor (L) and capital (K): Q = f(L, K). (46, 158)
PRODUCTION CAPABILITIES (production capacity)
Society's ability to produce economic
benefits with the full and effective use of all available
resources at a given level of technology development. (48)
AGAINST RISK (risk aversion) - a person who
given the expected income will prefer a certain, guaranteed
the result of a series of uncertain, risky outcomes. (359)
TRADE UNION (trade union) - an association of employees with
the right to negotiate with the entrepreneur from
name and on behalf of its members. (259)
PERCENT (interest) - see Loan interest.
DIRECT DEMOCRACY (direct democracy)- political
system in which every citizen has the right to
question. (450)
BERTRAND EQUILIBRIUM (Bertrand equilibrium) - describes
a market situation in which, under the conditions of a duopoly, firms
compete for the price of a good for a given output of each
firm Equilibrium stability is achieved when the price
turns out to be equal to marginal costs, i.e., competitive
equilibrium. (253)
CURNOUGH EQUILIBRIUM(Cournot equilibrium) achieved
in the market when, in a duopoly, each firm, acting
independently, chooses such an optimal volume of production,
what the other firm expects from it. Cournot equilibrium
arises as the point of intersection of the response curves of two firms.
BALANCE OF THE MANUFACTURER- marginal norm of technical
substitution of factors, which is equal to the ratio of prices
these factors. (168)
STACKELBERGER EQUILIBRIUM (Stackelberg equilibrium)
Describes a duopoly with an unequal distribution of the market
power between firms, so that one of them behaves like
leader (either by price, or by volume, or by volume and
to another at the same time), while the other implements the strategy
adaptations, adjusting their behavior depending on
from the choice made by the first firm. (253)
EQUILIBRIUM PRICE (equilibrium price) - balancing price
supply and demand as a result of competitive
RISK ALLOCATION (risk spreading) is a method for
in which the risk of possible harm is divided among the participants in such a way
so that the possible losses of each are relatively small.
Concise Dictionary of Economic Terms 549
RATIONAL IGNORANCE (rational disregard) - situation,
when voters do not see the benefit of participating in political
process. (457)
REAL WAGE (real wage rate) - purchasing
wage capacity, expressed in quantity
goods and services that can be purchased with the amount received.
REAL INTEREST RATE (real rate of interest) -
inflation-adjusted interest rate, i.e. expressed
at constant prices. (328)
ECONOMIC RESOURCES (economic resources), FACTORS
PRODUCTION- necessary for the production of economic
good elements. The main types of resources are:
labor, land, capital, entrepreneurial ability. Often to
they also add information. (46)
RISK ASSETS (risk assets) - assets, the income from which
partly depends on the case. (401)
ROWLESAN APPROACH (Rawls" view) - special variety
egalitarianism, developed in the writings of the modern philosopher
J. Rawls. According to Rawls, the utility of the least
wealthy members of society. (364)
MARKET (market) - a system of relations in which the relationships of buyers
and sellers are so free that prices for the same
goods tend to level out quickly. (80)
MARKET ECONOMY (market economy) - system based
on private property, freedom of choice and competition,
relies on personal interests, limits the role of government. (60)
SYNTHESIS (from Greek "connection") - a method that
in joining parts into a whole. (17)
RISK-INTENDED (risk preference) - the man, who
for a given expected return, will prefer the risky
result guaranteed result. (391)
MIXED ECONOMY (mixed economy) - type of society
synthesizing elements of market and command economies, in
in which the mechanism of the market is complemented by the vigorous activity of the state.
PERFECT COMPETITION (perfect competition) -
a market structure characterized by the following features:
1) a large number of sellers and buyers of goods; 2) uniformity
products; 3) absolute mobility resource movements,
the absence of barriers to entry and exit from the industry, 4) neither
one economic agent does not have power over prices; 5) complete
awareness of participants about prices and production conditions.
TOTAL INCOME, REVENUE (total revenue, TR) -
the amount of income a firm receives from the sale of a given quantity
550 Concise Dictionary of Economic Terms
where TR (total revenue) - total revenue;
Р (price) - price;
Q (quantity) - torn amount. (193)
TOTAL (TOTAL) PRODUCT (total product, TR) -
factor of production - the volume of goods produced, attributable to
for a certain amount of this factor. (159)
TOTAL DEMAND(aggregate demand)- sum of individual
demand in the market at each price. (85)
SPECULATIVE DEMAND(speculative demand)- demand,
arising in a society with high inflationary expectations,
when the danger of higher prices in the future stimulates additional
consumption (purchase) of goods in the present. (126)
SPECULATION(speculate)- activity, expressed
in order to resell at a higher price. (398)
SPECIFIC RESOURCES(specific resources)- resources,
the value of which is higher inside the firm than outside it. (185)
COMPARISON- a method that determines similarities and differences
phenomena and processes. (eighteen)
AVERAGE COSTS (average costs, AC)- costs for
unit of output. (198)
AVERAGE INCOME(average revenue, AR)- income attributable
per unit of goods sold. Under perfect competition
average income is equal to the market price:
AR = = -= P. (193)
AVERAGE PRODUCT(average product, AR)FACTOR OF PRODUCTION
The volume of goods produced per unit
factor used. (159)
PAYBACK PERIOD OF INVESTMENT PROJECT-
indicator of investment efficiency. Equal to the minimum number
periods required for the current value of the flows
net income was equal to the value of investment (net current
value investment project went to zero). How
the lower the payback period, the higher the efficiency of investment
project. (321)
LOAN INTEREST(interest)- price paid to owners
capital for the use of borrowed funds during
a certain period. (319)
Resources is the totality of all material goods and services used by a person to produce the products he needs
Conditionally resources are divided into:
- Free (which are in unlimited quantity, i.e. they are equal to zero)
- Economic (quantity is limited, but the price is different from zero)
The limited nature of economic resources is not absolute, but relative. It lies in the fundamental impossibility simultaneous and complete meeting the needs of all members of society.
The task of economic theory is the optimal allocation and use of resources.
Economic resources is a set of various elements of production that can be used in the process of creating material and spiritual goods and services. Economic resources are divided into material: raw materials and capital, and into human resources: labor and entrepreneurial ability. All these resources are factors of production.
Economic resources (Factors of production) include four groups:
(land)
- land
- minerals
- water resources
natural factor production reflects the influence of natural conditions on, the use in production of natural sources of raw materials and energy, minerals, land and water resources, air basin, natural flora and fauna. The natural environment as a factor of production embodies the possibility of involving in the production of certain types and volumes of natural resources, converted into a raw material from which the whole variety of tangible products of production is made.
With all the importance and significance of the natural factor in relation to production, it acts as a more passive factor than and. The thing is that natural resources, being mostly feedstock, undergo transformation into materials and further into the main means of production, which already act as actually active, creative factors. Therefore, in a number of factor models, the natural factor as such often does not appear explicitly, which in no way diminishes its significance for .
Investment resources ()
- building
- structures
- equipment
Financial capital, namely stocks, bonds, money, does not apply to economic resources, because. not related to actual production.
The factor "capital" represents the means of production involved in production and directly participating in it.
capital as production factor can act in different forms, forms and be measured in different ways. physical capital presented in the form of (fixed means of production), but it is legitimate to attach to it and (), which also plays the role of a factor of production as the most important material resource and source of production activity.
Entrepreneurial Talent
Entrepreneurial Ability— the ability to organize production, make decisions on business management; be an innovator.
An entrepreneur performs four important functions:- Takes the lead in rationally combining resources into a single process for the production of goods and services
- Performs the task of making major business decisions
- Is an innovator, that is, introduces new products, production technologies and forms of business organization into use on a commercial basis
- Risking not only his time and business reputation, but also invested
In a market economy, economic resources bring income to their owners in the form of rent (land) and (capital). The income of those who offer their labor is called , and entrepreneurial income is called .
Let's name another significant production factor. It is collectively referred to as scientific and technical level of production. In its economic essence, the scientific and technical (technical and technological) level expresses the degree of technical and technological perfection of production.
Market of economic resources in social reproduction
So far, the focus has been on market consideration finished products and the study of the behavior of firms producing these products in various market structures.
Meanwhile, in order to produce any kind of good or service, a firm needs to acquire economic resources that are directly or indirectly owned by households. The study of the specific features of demand, supply and pricing in the market for factors of production plays an important role in understanding the processes taking place in the economy.
The importance of the market for factors of production is due to the fact that:
- Firstly, the prices existing in the resource market determine the level of economic costs of all operating enterprises, which in turn determines the size of the market supply in the finished product market;
- secondly, prices for factors of production are the most important factor in the formation of household cash income (in the form of wages, rents, interest and profits), which determine the market demand for finished products;
- thirdly, the normal functioning of the market for factors of production contributes to the efficient distribution of economic resources between economic entities, and thereby minimizes the opportunity costs of producing one or another type of finished product.
In contrast to the finished product market, where households make demand and firms form supply, in the resource market, the functional roles of economic entities change dramatically. Now households offer the economic resources at their disposal and become the subjects of supply, while firms purchase the production resources they need and act as subjects of demand.
Let us consider in more detail the features of the formation of supply and demand in the market of factors of production.
Demand and production in the resource market
Derived nature of demand for resources
Demand for economic resources is presented by manufacturing firms.
Demand for economic resources is determined by the amount of resources that firms are willing to purchase at existing prices, in a given place, at a given time.
In contrast to the demand for finished products, the demand for resources has a derivative character, since it directly depends not only on the price of the resource, but also on the demand and prices for finished products manufactured by the firm using this resource.
Analysis of demand in the short term
To analyze the demand for resources, we will make several simplifying assumptions:- the firm operates in the short run;
- uses only two resources: (L) and capital (K), and labor is a variable factor, and capital is a constant factor;
- the resource market is perfectly competitive;
- The finished product market is also perfectly competitive.
Imagine production function analyzed company in the form of a table.
As can be seen from the table, increasing the number of employed work force(L), the firm achieves an increase in output (Q), but due to the law of diminishing returns, the marginal product of labor (MPL) gradually decreases. The main question that the firm must decide for itself is how much labor should be hired under given conditions.
Marginal product in money terms
Obviously, each additional employee brings the company both additional income and additional costs.
To assess the marginal profitability of labor, the marginal product of labor in monetary terms (MRPL) is used.
Marginal product of labor in monetary terms reflects the increase in the total income of the firm as a result of the use of one additional unit of labor (column 5), and is calculated using the formula
MRPL= ∆TR/∆L or MRPL=dTR/dL.
If the marginal product of labor is known in kind(MPL) and the market price of manufactured products (note that under perfect competition the price does not depend on the volume of output and is equal to marginal income), then the marginal product of labor in monetary terms can be estimated through the product of MPL and MR:
MRPL=dTR/dL=d(QPx)/dL=Px(dQ/dL)=Px*MPL, and since Px=MR, then МRPL=MPL*MR.
This equality holds for any competitive resource market, regardless of the structure of the finished product market.
The marginal cost of the firm, due to the use of one additional unit of labor (MRC), in conditions of perfect competition in the labor market, corresponds to the price of a unit of labor, i.e. wages (W).
Optimal hiring conditions (in case of one variable resource)
Hiring an additional worker is justified until the marginal profitability of labor equals its marginal cost, i.e. profit growth due to a change in the variable resource will no longer be possible (ΔΠ=0)
Let's prove this statement.
Let the production function of good X be given by the equation: Qx=f(L), where Qx- the volume of output of goods X; L- the number of units of the variable resource (labor).
Then the marginal product of labor is: MPL=dQx/dL=f'(L).
The profit of the firm, by definition, is equal to the difference between total income and total, or:
n=TR-TC.
Total income:
TR=PxQx.
Total costs:
TC=FC+VC,
but since variable costs:
where w- the price of a unit of a variable resource (labor), then:
TC=FC+wL.
Substitute the resulting expressions of total income and total costs into the profit function, replace Qx by f(L) and get:
n=TR-TC=PxQx-(FC+wL)=Pxf(L)-(FC+wL).
The profit maximization condition implies the impossibility of increasing profit at the optimum point, i.e. requires the derivative of the profit function to be equal to zero with respect to the variable resource
dp/dL=0.
We calculate the derivative with respect to L and get: dp/dL=Pxf`(L)-w=0, or Pxf`(L)=w.
Because by definition f`(L) is the marginal product of labor MRL), and the product px on the MRL equals the marginal product of labor in monetary terms ( MRPL), then the condition for optimal hiring (or profit maximization) takes the form: MRPL=w, which was to be proved.
Equality MRPL=W reflects optimal recruitment condition production resource, and fig. 8.1 gives a graphical representation of the optimum condition.
8.1 Optimal recruitment condition
In the example under consideration, the optimal number of labor units is L*=7. This means that the use of 7 units of labor in the enterprise allows maximize the firm's profits.
The economic meaning of the MRPL curve is that it shows what the amount of resource the firm is willing to use, which maximizes profit, at a given resource price level, and this is nothing more than a definition of demand.
In other words, the MRPL curve reflects the demand for the resource being used.
If the market price of labor falls from W* to W2, then the optimal number of units of labor will increase to L2, and vice versa, if the price of labor (wage) increases to W1, then the amount of labor used will decrease to L1 (Fig. 8.2).
8.2 Dependence of optimal hiring on wages
Conditions for Optimal Hiring in the Long Run (Case of Multiple Variable Resources)
When a firm is dealing with multiple variable inputs, the problem of choice becomes more difficult because changes in the price of one factor can change the demand for other inputs. However, in general the optimum condition remains the same.
profit maximizing firm must use each resource to the extent that its marginal return (MRP) would equal the cost of using its additional unit (P), or:
- MRP1=P1,
- MRP2=P2,
- MRPn=Pn,
where 1,2,...n are the indices of the corresponding resources.
This condition can be converted to equality:
Profit maximization in cost minimization
When analyzing the prerequisites for efficient production in the long run (topic "Production, technology, production function"), the condition was determined under which the company achieves cost minimization for a given output volume.
In the case of n number of resources, it (the minimization condition) is written as an equation:
where MPi is the marginal product of resource i
Pi is the price of resource i (for i=1.2…n).
This expression means that a firm seeking to minimize its costs must allocate its budget funds in such a way as to obtain the same surplus product per ruble spent on the acquisition of each resource.
Graphically, the optimal combination of resources (K*,L*) lies at the point of contact between the isocost and isoquant lines. (Fig. 8.3)
8.3 Combination of resources that minimizes firm costs
If we transform the above equality by multiplying the numerator (MP) by the price of the product produced (Px), we get an equality of the form:
In this form, the expression means that an enterprise minimizing its own must distribute its costs in such a way as to obtain the same surplus product in monetary terms per ruble spent on the acquisition of each resource.
The cost minimization condition is derived from the profit maximization condition. Determination of a technologically efficient combination of resources does not guarantee the maximum profit for the firm. On the contrary, if the firm is at the optimum point and receives the maximum profit, this already implies a minimum level of costs.
Demand for resources and factors determining it
Price and non-price determinants of demand
Among the most important factors that determine the demand for the resource used by the firm, the following are distinguished:
1. Demand for finished products produced with the help of this resource.Obviously, the higher the demand for a product, the more the firm is interested in its release, and the more resources it needs to produce it. Conversely, the demand for a resource used to produce products that no one needs will be close to zero.
2. Resource performance.The productivity of a resource can be measured in terms of its marginal product. If the resource used is of high productivity, then, other things being equal, the demand for it will be more significant than for a resource with low productivity.
3. The price of the resource.Ceteris paribus (and, above all, with the same prices for substitute resources), a reduction in the price of a resource in accordance with the law of demand can cause an increase in the demand for a resource, and its rise in price - a decrease in the demand.
4. The value of the marginal income of the firm (MR).With all other characteristics of the resource used unchanged, the higher the firm's marginal revenue (MR), the higher the marginal product of the resource in monetary terms (MRPi = MR * MPi), in other words, the profitability of the resource used, and, therefore, the higher the firm's demand to this resource.
5. Prices for other resources.In contrast to the market for finished products, a change in the prices of other inputs can cause two opposite effects: the substitution effect and the output effect. The degree of influence of these effects depends on the belonging of the analyzed resources to the group of substituting, complementary or neutral factors of production:
- neutral resources have an extremely low, close to zero impact on the market of the main factor;
- replacement resources satisfy similar requests of the manufacturer, and therefore are competitors for the main factor;
- complementary resources are used in production together with the main factor in proportions determined by the technological process.
Let's abstract from the first group of resources and analyze the impact on the producer's demand of changes in prices for complementary and replacement resources.
Assume that labor and capital are considered substitutes for resources.
If, for any reason, the price of labor increases, this may cause the producer to seek to replace a more expensive resource with a relatively cheaper one. Thus, the substitution effect will increase the demand for capital.
At the same time, an increase in labor prices can cause a corresponding increase in total (TC) and, as a result, a reduction in the supply of finished products and a decrease in demand for all resources used. In this case, the volume effect will reduce the demand for capital.
The actual impact of a change in the price of labor, demand, and capital will depend on the ratio of the effects considered.
If labor and capital are complementary and are applied in strictly fixed proportions, then the substitution effect will be zero. In this case, the capital market will be affected exclusively by the effect of the volume of production, i.e. an increase in the price of labor will cause a reduction in the demand for capital.
Elasticity of demand for a resource
For a resource at a price shows the degree of quantitative change in the value of demand for a resource when the price changes by 1%.
Elasticity is calculated using standard formulas:
arc elasticity:
where P1, P2 - initial and subsequent prices;
Q1,Q2 - initial and subsequent quantities of demand.
point elasticity:
- where Q`(P) is the derivative of the demand function with respect to price;
- P is the market price;
- Q(P) is the quantity demanded at a given price.
Factors that determine the elasticity of demand:
1. Availability and market availability of substitute resources.
If a resource has many good substitutes, then the elasticity of demand for it will be high, since a price increase will force the producer to sharply reduce demand and use alternative factors of production. Conversely, if the resource has no serious substitutes, then the demand for it will be relatively stable.
2. The share of costs for this resource in the total costs of the company.
Ceteris paribus, the smaller the share of total costs falls on the resource in question, the lower the elasticity of the firm's demand for it.
3. Analyzed period of time.
Ceteris paribus, the shorter the period of time we consider, the less elastic the demand for resources. Obviously, in the short term, it is more difficult for a manufacturer to adapt to rising prices and find the necessary substitute resources.
4. on a product made using this resource.
A decrease in the price of products characterized by elastic demand leads to an increase in sales, and as a result, to an increase in demand for resources. Therefore, ceteris paribus, the higher the elasticity of demand for a product, the higher the elasticity of demand for the resource used in its production.
Under the concept "work force" This refers to those workers who are over 16 years old and who either already have a job or are actively looking for one, or who are waiting for their services to be used again after leaving their job. Those individuals in the labor market who do not have paid work constitute the ranks of the unemployed. People who are not employed, are not looking for work, and do not expect their employer to give them a job again are not included in the labor force. Therefore, the total labor force consists of the employed and the unemployed. The quality and quantity of the labor force in each specific labor market is constantly changing.
The ratio of the number of unemployed to the labor force is the unemployment rate. And although this value is very approximate and contains certain inaccuracies, it is nevertheless the most often mentioned value necessary to assess the state of the market.
The marketplace that provides jobs for workers and coordinates employment decisions is called labor market.
The labor market is the mechanism by which the ratio between workers and the number of jobs is regulated. In the labor market, the actions of both buyers and sellers serve to distribute labor and determine the prices of different kinds labor activity. These prices act as signals or incentives in the distribution of labor. From the worker's point of view, the price of labor is important in determining income and hence purchasing power.
Under salary refers to the price paid for the use of the labor of an employee. Depending on the method of estimating labor costs, time, piecework, piecework, and other types of wages are used.
Nominal salary name the amount of money received by the employee, real salary - a set of goods and services that can be purchased with this money, taking into account their purchasing power.
The main factor influencing the level of wages is the efficiency of the use of labor resources. It is measured primarily by labor productivity.
Labor market research begins and ends with an analysis of labor supply and demand. As for the demand that exists in the labor market, here are employers who make decisions on hiring labor depending on the state in which all three markets are. With regard to labor supply in the labor market, there are groups such as workers and future workers whose decisions about where to work and whether to work at all are made taking into account the opportunities to spend their time.
The demand for labor is derivative character, that is, the demand for labor depends on the demand for goods produced with the help of this labor. The labor demand curve slopes downward.
Under conditions of perfect competition, the price of labor is formed like the price of any other commodity. This means that all employees receive equal pay, regardless of which firm they work for. Firms treat wages as a given value. Therefore, for a single firm the supply of labor is perfectly elastic .
We assume that the firm should increase the number of employees only as long as the marginal income (or additional income) from hiring last employee will not be equal to the marginal (incremental) cost of wages of this worker. Since a firm's profit equals revenue minus costs, if marginal revenue exceeds marginal cost, total profit can rise as the number of employees increases. Similarly, if marginal revenue is below marginal cost, then profits begin to decrease with the last employee hired, and then profits can be increased by decreasing the number of employees.
As a result, profit maximization is only possible at a level of employment where the marginal revenue per last hired worker (MR L) is equal to the marginal cost of labor (MC L).
Thus, if МR L > MC L , it is necessary to increase the number of employees. If MR L< MC L , нужно уменьшать число занятых. Если МR L = MC L , не нужно менять число занятых, так как при этом прибыль максимальна.
Based on the previous assumptions, we can assume that the marginal cost per unit of labor is the amount paid wage in monetary terms (W). The marginal revenue from hiring an additional unit of labor, called marginal money product (MRP L), is equal to the cost of the additional product produced. MRP L equals the marginal product produced by wage labor multiplied by the additional income received per unit of output (MR):
MR L = MRP L = MP L * MR.
Since we proceeded from the assumption that the firm sells its products in a competitive market, which implies that the price of the product does not change depending on production, then the additional income per unit of output is nothing but the price of the product produced by the firm (P).
Thus, for firms operating in competitive markets, the marginal money product received from an additional unit of labor is equal to the price of the product produced by the firm, multiplied by the marginal product of labor:
MRP L = P * MP L .
The marginal product of labor equals the marginal cost, and the maximum profit can be earned competitive firm at the point where marginal money product equals money wages:
Both halves of this equation, both the marginal money product and the marginal cost of labor, can be expressed in terms of monetary units.
The level of wages in conditions of pure competition is maximum - the worker receives the marginal product of labor. The firm's marginal labor cost (MC L) equals wages (W):
It is profitable for the firm to hire additional workers as long as the increase in revenue exceeds the increase in costs, i.e. until the marginal product of labor (in monetary terms) equals the marginal cost, i.e. with salary:
MRP L=MC L=W.
According to neoclassical theory, The number of employees is inversely proportional to the level of the average wage.
Topic 7. Fundamentals of the theory of the resource market
Features of demand and supply of resources.
Principles of demand for the resources of a profit maximizing firm.
The marginal product of a resource in terms of money.
Marginal cost per resource.
Demand for a resource in the short and long run.
As you know, the demand for final goods and services is presented by households acting as buyers. The offer of goods and services is created by firms acting as sellers. How is the demand for factors of production formed, who makes it, and how is it determined? A distinctive feature of the markets for factors of production is the fact that firms act as buyers here, and households are sellers, or, in other words, the subjects of demand are firms, and the subjects of supply are households. At the heart of consumer demand, as we know, is the utility function. At the heart of the demand for factors of production is the income that the firm seeks to obtain by producing various goods and services with the help of these factors. This means that the firm makes a demand for resources only insofar as the consumer needs the goods produced with these resources, and not vice versa. For example, shoe factories demand leather and shoemakers because consumers demand leather shoes. Thus, in economic theory demand for factors of production is called derived demand. This is the first and very significant difference between demand in the markets for factors of production and demand in the markets for final goods and services.
It was said above that manufacturing process is a process of interaction of various factors of production. It is impossible to organize the production process, having, for example, capital, but not having labor power, and vice versa, i.e., no single factor can produce a product. Hence it follows that demand for factors of production is interdependent. This is the second significant difference between demand in the markets of factors and demand in the markets of final goods and services. The firm, presenting the demand for factors, is faced with the need to solve the following problems:
Optimal combination of production factors;
Minimization of costs for each given volume of production;
Determining the volume of production that maximizes the amount of profit.
Let us consider in more detail how these three tasks are solved.
What underlies the firm's demand for factors of production and what determines its boundaries? At first glance, the answer seems obvious - resource prices. However, the derivative nature of the demand for factors on the part of the firm predetermines its dependence also on the productivity of the factors, and on the level of prices for products produced with the help of these factors. The productivity of a variable factor can be measured not only in physical, but also in monetary units. The cost indicator of factor productivity is the marginal product of the factor in monetary terms, or the marginal income from the product of the factor used. Marginal factor product in monetary terms (MRP L) is the product of the marginal physical product of a variable factor (for example, L) and the marginal revenue received from the sale of one additional unit of output:
MRP L = MP L · MR Q
where MRP L is the marginal product of the factor L in monetary terms; MP L - marginal product of factor L in physical terms; MR Q is the marginal revenue from the sale of an additional unit of output.
Thus, the marginal product of the factor in monetary terms shows the increase in total income as a result of using one more (additional) unit of the variable factor L, with the number of all other factors unchanged.
In conditions of perfect competition, when firms are "price takers", the marginal product of factor L in monetary terms is the product of the marginal product of factor L in physical terms and the unit price of output:
MRP L = MP L · P
where P is the price of a unit of output. Recall that under perfect competition P = MR.
As you know, in conditions of imperfect competition, the marginal revenue from the sale of an additional unit of output will be less than its price. This means that, ceteris paribus, the marginal factor product in monetary terms (MRP L) of a perfect competitor will be greater than that of a pure monopolist.
Consider the situation on the example of a company that produces leather shoes and sells it in a competitive market. Let us assume that the number of units of capital used by the firm is a constant value, and the number of workers employed is a variable value. Suppose that the next hired worker produces three pairs of shoes per day, which can be sold at a market price (P) equal to 100 rubles. for a couple. In this case, the marginal product of labor in monetary terms will be 300 rubles:
MRP L = MP L · MR Q = MP L · P = 3 · 100 rubles = 300 rubles
Data on the marginal product of labor in a shoe factory are given in the table below.
Tab. Marginal product of labor in money terms
Loading...