Say that the price of labor, which is the wage rate, is equal to $10, $10 per unit of labor. Produce 90 more units of output, so this is, and then let's Unit of labor we bring on, we're going to be able to So, another way to think about it, for every incremental Labor or more capital, so our marginal product of Our marginal product of labor at this output, remember it changes, as we have different output and we bring on more And at our current output, we know what the marginal product of labor and the marginal product of capital is. So, let's say that our output right now, I don't know, our current output, our current output is, I'm just going to make up something, 1,000 units per day. And to help us think through this, let's say that we are atĪ certain level of output. These factors they want, they have to think about So, they don't just thinkĪbout these dimensions of how much inputs of Now, an interesting question that might've already crossed your minds are, is that firms have aĬertain amount of resources that they are going to think about, well, how much do I put in labor versus how much do I put into capital. The quantity of capital for the firm to employ. So, this would be, actually, let me, this would be the capital, And so, here, it wouldīe rational for the firm, if we're just looking at the dimension of capital to product this much. Revenue that you get from each of those extra units of capital is higher than the cost of each of those extra units of capital. And so, once again, it makes sense to keep bringing on moreĪnd more and more capital as long as the incremental And so, that would be the marginal factor cost of the capital. Whatever the market rate for renting that capital is. We'll assume, once again, that this is a perfectlyĬompetitive capital market, so you just have to pay And then we have our marginal factor cost, which is really just, and
And we typically use a K for capital, just so we don't get the CĬonfused with other things. You have diminishing returns, so that's why it's downward sloping, so marginal revenue product. And so, you will have your marginal revenue product of capital. And then the verticalĪxis, the price of capital, you could view that as the rent rate, rent rate, if you're thinking about maybe you're renting some type of machinery. The horizontal axis right over here is going to be the quantity not of labor, but the quantity of capital. Is going to be the firm, the firm as you think about capital. Thinks about that input, how it thinks about labor. And we can draw anĪnalogous thing for capital. I'll do this is the labor for the firm, and I'll put a little star over here, so that quantity of labor. And so, it would be rational for it to hire that quantity of labor.
Of labor that they hire is higher than the incremental cost of each of those units of labor. Revenue product of labor, as long as the incremental revenue that the firm gets forĮach of those people or each of those units The firm to keep hiring as long as the marginal
And we've talked about multiple times that it's rational for And so, that's why we haveĪ horizontal line there, so that's the marginalįactor cost of labor. And if we're assuming that this firm is in a competitive, perfectlyĬompetitive labor market, well, they're just going to have to pay whatever the wage is in the market. And I'm going to be very specific that this one is the marginal You are likely to have a downward sloping marginal revenue product curve, MRP. You have the wage rate, wage rate, which you could We have the quantity of labor hired by the firm. Revenue product of labor and based on the marginalįactor cost of labor. It from a firms perspective on what is the rationalĪmount of labor to hire based on the marginal But just as a little bit of review, we've already thought about
We're going to start thinking about capital as well, which we know is another one And we're going to go beyond just thinking about labor as a factor. Now going to continue our discussion of factor markets.