Profit maximizing principle for factor markets

Definition

The profit maximizing principle for factor markets refers to the concept that firms will hire factors of production (such as labor or capital) until the marginal revenue product equals the factor's price.

Analogy

Think of a pizza shop owner who wants to maximize their profits. They will keep hiring more workers until the additional revenue generated by each new worker is equal to the cost of hiring them.

Related terms

Perfectly Competitive Labor Market: A labor market where there are many buyers (firms) and sellers (workers), and no individual buyer or seller has control over the market price.

Law of diminishing marginal returns: This law states that as more units of a variable input are added to a fixed input, eventually the marginal product of the variable input will decrease.

Marginal Revenue Product (MRP): The additional revenue generated by employing one more unit of a factor of production.