The Two Profit-Maximizing Conditions The two profit-maximizing conditions are simply two views of the same choice process Marginal revenue Marginal revenue Output prices product of a of a unit qutput price unit of of output lechnology input (labar) Marginal cost Marginal cost Input prices of a un it of a unit Technology of input (labor) output Input prices Firm will Firm will hire until: produce until: WEMRPL P=MG
31 The Two Profit-Maximizing Conditions The two profit-maximizing conditions are simply two views of the same choice process
The Trade-Off Facing Firms Product market Labor market Marginal revenue product MRI X Py L X Mum profit Value of labors Wage cost of a marginal product arginal unit of labo FIRMS 32
32 The Trade-Off Facing Firms
The market demand curve for labour The market's labour demand curve is not merely the horizontal sum of firm's VMP curves. Higher industry output in response to a wage reduction also reduce the output price. The Market labour demand curve is steeper than that of each firm and more inelastic 33
33 The Market demand curve for labour The Market’s labour demand curve is not merely the horizontal sum of firm’s VMP L curves. Higher industry output in response to a wage reduction also reduce the output price. The Market labour demand curve is steeper than that of each firm, and more inelastic
Market demand for labor Reduction in wage rate causes all firms to increase output; market supply increases And output price falls. So VMP shifts left. VMP Market Irm (100 firms 20 10 WVMP1 202545 20002500 Labor per Labor per Period Period 34
34 Market Demand for Labor Wage Rate Labor per Period 20 VMP 0 (100 firms) VMP1 25 45 20 10 Reduction in wage rate causes all firms to increase output; market supply increases; And output price falls. So VMP shifts left. Labor per Period Firm Market 2000 2500
Determinants of Demand Elasticity for Inputs The price elasticity of demand for a variable input will be greater The greater the price elasticity of demand for the final product The easier it is for a particular variable input to be substituted for by other inputs The larger the proportion of total costs accounted for by a particular variable input he longer the time period being considered
35 Determinants of Demand Elasticity for Inputs The price elasticity of demand for a variable input will be greater The greater the price elasticity of demand for the final product The easier it is for a particular variable input to be substituted for by other inputs The larger the proportion of total costs accounted for by a particular variable input The longer the time period being considered