No Such Thing as a Free Lunch: Principles of Economics (Part 49)

"Advertising is, actually, a simple phenomenon in terms of economics. It is merely a substitute for a personal sales force - an extension, if you will, of the merchant who cries aloud his wares."

Rosser Reeves

Input Demand: The Labor and Land Markets

(Part E)

by

Charles Lamson

The Firm's Profit-Maximization Condition in Input Markets

Thus far we have discussed the labor and land markets in some detail. Although we will put off a detailed discussion of capital until a few posts in the not-so-distant future, it is now possible to generalize about competitive demand for factors of production. Every firm has an incentive to use variable inputs as long as the revenue generated by those inputs covers the cost of those inputs at the margin. More formally, firms will employ each input up to the point that it's price equals its marginal revenue product. This condition holds for all factors at all levels of output:

Hiring more labor drives down the marginal product of labor, and using less capital increases the marginal product of capital. This means that the ratios can come back to equality as the firm shifts out of capital and into labor.

So far we have used very general terms to discuss the nature of input demand by firms in competitive markets, where input prices and output prices are taken as given. The most important point here is that demand for a factor depends on the value that the market places on its marginal product. The next few posts explore the forces that determine the shapes and positions of input demand curves. 

*CASE & FAIR, 2004, PRINCIPLES OF ECONOMICS, 7TH ED., P. 209*

end