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MARGINAL FACTOR COST AND AVERAGE FACTOR COST: The relation between marginal factor cost and average factor cost is comparable to other average-marginal relations found in the study of economics. For a firm that hires factors in a perfectly competitive factor market, marginal factor cost and average factor cost are equal, and equal to the factor market price. All three are represented by a horizontal, or perfectly elastic, curve equal to the factor market price. For a firm that hires factors in an imperfectly competitive factor market, especially monopsony, marginal factor cost is greater than both average factor cost and the factor market price.
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Lesson 23: Factor Market Equilibrium | Unit 4: Monopsony
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Page: 17 of 24
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- The labor employment decision:
- A firm maximizes profit when the additional cost of a decision is equal to the additional revenue, whether that decision is producing output or employing factor services.
- The critical conclusion from this analysis is that a monopsony employs a factor such that marginal revenue product (MRP) is equal to marginal factor cost (MFC).
- MRP = MFC
- However, because this marginal factor cost (MFC) is greater than factor price (W) for monopsony, we have the secondary result that:
- MRP > W
- In other words, a perfectly competitive firm will hire workers up to the point where the extra revenue generated by the last worker is greater than the wage paid.
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PERFECT COMPETITION, PROFIT MAXIMIZATION A perfectly competitive firm is presumed to produce the quantity of output that maximizes economic profit--the difference between total revenue and total cost. This production decision can be analyzed directly with economic profit, by identifying the greatest difference between total revenue and total cost, or by the equality between marginal revenue and marginal cost.
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RED AGGRESSERINE
[What's This?]
Today, you are likely to spend a great deal of time flipping through mail order catalogs wanting to buy either an instructional DVD on learning to the play the oboe or a small, foam rubber football. Be on the lookout for rusty deck screws.
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The average length of a "business lunch" is about 36 minutes.
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"Intense concentration hour after hour can bring out resources in people they didn't know they had. " -- Edwin Land, inventor, entrepreneur
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NE
Nash Equilibrium
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