chapter 9: input use and demand for inputs. key topics 1. derived demand for inputs 2. revenue...
TRANSCRIPT
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Chapter 9:
Input Use and Demand for Inputs
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Key Topics
1. Derived demand for inputs
2. Revenue concepts related to input usea. Total revenue product (TRP)
b. Average revenue product (ARP)
c. Marginal revenue product (MRP)
3. Profit-maximizing input levela. Profit-max input rule (MRP = input P)
b. Input demand curve
c. Shifts in factor demand curves
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Derived Demand
The demand for resources (inputs) is dependent on (or derived from) the demand for the outputs those resources can be used to produce.
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Input & Output Decisions
Related via production function
q
q*
L* L
TP
Q* = profit-maximizing q L* = profit-maximizing L
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Revenue Concepts that are functions of input usage
Total Revenue Product (TRP)Average Revenue Product (ARP)Marginal Revenue Product (MRP)
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Revenue Products
Total Revenue Product
= TRP
= TP x P
= paired observations on the $ value of output and physical units of a variable input
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Revenue Products
Average Revenue Product
= ARP
= AP x P
= revenue per unit of input
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Revenue Products
Marginal Revenue Product
= MRP
= MP x P (= MR*)
= additional revenue per unit of additional input
*for competitive firm
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Total RevenueProduct ($)
Average &Marginal RevenueProduct ($)
TP x P = TRP
AP x P = ARP
Input a
MP x MR = MRP
Input a
0
0
A
B C
a1 a2 a3
a1 a2 a3
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Profit-Maximizing Input Level
Keep using an input up to the point where the additional revenue from the last additional unit equals the additional cost
MRP = input P
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Labor Price (= w)
$
P
S
DL
$
L
MktFirm
P = w
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Profit-Maximizing Input Level
$
$
LL*
TRP
TCπ*L*
LMRP
wARP
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Find D for Variable Input (e.g. L)
$
ARP
W3
W2
W1
MRP
LL3 L2 L1
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Increased D for Labor (examples)
$
w
w1
w2
MRP
LL1 L2
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Increased D for Labor (examples)
$
P ofOutput
LL1 L2
w P2 > P1
MRP2 (P2)
MRP1 (P1)
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Increased D for Labor (examples)
$
MP
MP2 > MP1
w
L
MRP2 (MP2)
MRP1 (MP1)
L1 L2
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Profit-Max Input Rule = Profit-Max Output Rule
MRP = MFC MPL ∙ MR = w
MR = w / MPL
MR = MC
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Profit Max Input Side = Profit Max Output Side
TPq
q*
LL*
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Profit Max Input Side = Profit Max Output Side
$
w
MRP
LL*
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Profit Max Input Side = Profit Max Output Side
$
MC
MR
qq*
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Other Input Economics Applications
1. Professional athletes (salaries)
2. Land (rent and usage)