AP Microeconomics AMSCO Guided Notes
5.3: Profit-Maximizing Behavior in Perfectly Competitive Factor Markets
AP Microeconomics Guided Notes
AMSCO 5.3 - Profit-Maximizing Behavior in Perfectly Competitive Factor Markets
Essential Questions
- How does a business decide how many workers to hire in a market where no single buyer or seller has the power to influence all prices?
I. Characteristics of Perfectly Competitive Factor Markets
1. What is a factor market and how does it differ from an output market?
A. Many Buyers and Sellers
1. How does having many independent buyers and sellers affect the price in a perfectly competitive market?
2. What happens to wages in a labor market when there are many workers seeking jobs and many employers seeking workers?
B. Similar Skills and Abilities
1. Why must all workers in a perfectly competitive labor market accept the market wage rather than negotiate individually?
II. Profit-Maximizing Behavior of Firms Buying Labor
A. Marginal Costs and Products
1. What is marginal factor cost and how does it relate to the wage rate in a perfectly competitive labor market?
2. What is the marginal revenue product of labor and how does an employer use it to decide how many workers to hire?
3. What does it mean when MRP equals MFC, and what hiring decision should an employer make in each scenario?
III. The Labor Market vs. Output Markets
1. How can a firm be a perfect competitor in the labor market but an imperfect competitor in its output market?
2. What allows a company to charge higher prices than competitors even if it operates in a perfectly competitive labor market?
IV. Calculating Profit-Maximizing Behavior
A. Spending on Inputs
1. What is an input and what principle should guide a rational business owner in allocating spending across different inputs?
2. Why do economists focus on marginal analysis when evaluating business decisions about inputs?
B. Calculating Marginal Revenue Product
1. What is the formula for calculating marginal revenue product and what does each component represent?
2. What is marginal physical product and how does it differ from marginal revenue product?
C. Calculating VMPL and MRP in a Perfectly Competitive Market
1. What is the value of the marginal product of labor and how is it calculated in a perfectly competitive market?
2. Why is VMPL equal to MRP in a perfectly competitive output market but not in an imperfectly competitive one?
3. How should an employer adjust hiring decisions based on the relationship between VMPL and the unit price of output?
Key Terms
perfectly competitive factor market
marginal factor cost
marginal revenue product of labor
marginal product
value of the marginal product of labor