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WEIGHT LOSING: An activity in which the transportation cost of the inputs is greater than the transportation cost of the output. Using the term weight to mean transportation cost, an activity is said to lose weight if the cost of getting the inputs to the factory is greater than the cost of moving the output to the market. A weight-losing activity has a greater attraction to, and tends to locate near, the source for the inputs.

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Lesson 23: Factor Market Equilibrium | Unit 3: Perfect Competition Page: 13 of 24

Topic: Employment <=PAGE BACK | PAGE NEXT=>

  • This diagram sets the stage for analyzing the labor employment decision by a given firm, assuming perfect competition holds.

  • The critical question facing the firm is: How many workers should it hire?

  • The profit-maximizing decision by the firm is to hire 50 workers at the $10 wage.

    • Should the firm hire more workers, profit declines.
    • Should the firm hire fewer workers, profit declines.

  • The critical conclusion from this analysis is that a firm in a perfect competition factor market employs a factor such that marginal revenue product (MRP) is equal to marginal factor cost (MFC).

  • However, because this marginal factor cost (MFC) is equal to the factor price (W) for perfection competition, we have the secondary result that:

  • MRP = W
  • This is THE condition for efficiency in a factor market.


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INTEREST RATES, AGGREGATE DEMAND DETERMINANT

One of several specific aggregate demand determinants assumed constant when the aggregate demand curve is constructed, and that shifts the aggregate demand curve when it changes. An increase in interest rates cause a decrease (leftward shift) of the aggregate curve. A decrease in interest rates an increase (rightward shift) of the aggregate curve. Other notable aggregate demand determinants include the federal deficit, inflationary expectations, and the money supply.

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