What is meant by productivity, cost, and firm demand for one production factor. Can you please explain?© BrainMass Inc. brainmass.com December 24, 2021, 5:34 pm ad1c9bdddf
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Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a certain product people are willing to buy at a certain price, and the relationship between price and quantity demanded is known as the demand relationship.
Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied into the market is known as the supply relationship. Price therefore, is a reflection of supply and demand.
The relationship between demand and supply underlie the forces behind the allocation of resources. In market-economy theories, demand and supply theory will allocate resources in the most efficient way possible.
The various factors of production are:
1. Material/Natural resources
Let us take labour as one production factor.
The labour market is an informal mechanism where demand for and supply of labour interact.
Demand for labour arises mainly from employers' need for workers to produce goods and services. Thus, the firms who sold goods and services in the unit on supply and demand now become the buyers in the labor market. Firms need workers to make products, design those products, package them, sell them, advertise for them, ship them, and distribute them, among other tasks. No worker will do this for free, and so firms must enter into the labor market and buy labor. Firms determine the demand of labour.
Firms are willing to buy labor up to the point where the marginal revenue product of labor is equal to the market wage.
The marginal revenue product is the extra revenue a firm generates when they buy one more unit of input (in this case, the input is labor: a unit of labor isn't a new employee, it's another unit of work; an example would be an additional hour of work). As long as the income generated by extra hours of work balances (or exceeds) the wages paid for those extra hours of work, firms will be willing to pay for more labor.
If the marginal revenue product (MRP) of labor is equal to the market wage, the firms will be at their optimal point of labor consumption, since buying more labor would mean that the MRP is less than the wage, and buying less labor would mean that the MRP is greater than the wage. If the marginal revenue product of labor is less than the market wage, then the firms are using too much labor, and those firms will probably cut back on the hours they buy until the MRP of labor is equal to the wage.
MRP > w : The firm will buy more labor
MRP = w : The firm is buying the right amount of labor
MRP < w : The firm is buying too much labor
Thus demand for labour is affected by:
o By employers
o Derived demand
o Dependent on demand for product
o Productivity of Labour (MPP)
o Marginal Revenue Product (MRP)
Supply of Labour
The supply of labour includes all those who are either working or looking for work, that is all those who are participating in the labour force. The labour market participation rate and the supply of labour are influenced by demographics such as the number of working age people. The conditions of the economy in general and in the labour market in particular the likelihood of finding work, education levels and a host of other variables influence the participation rate and supply of labour. Thus the supply of labour is affected by:
1. From employees
2. Geographical mobility of labour.
3. Occupational mobility of labour
The combination of supply and demand curves for labor determines how much labor is purchased, and at what price. (Labor price is usually called a wage, the amount of money paid for a unit of work).
The cost function for one variable factor of production is applicable in short run. In the short-run at least one factor of production is fixed. During this period a firm can produce varying levels of output but only by varying variable inputs. Accordingly the firm has three distinct types of costs:
i - fixed costs associated with the fixed factor of production - usually K. Fixed costs must be paid no matter the level of output, i.e. even if the firm shuts down fixed costs still have to be paid;
ii - variable costs associated with variable factors of production - usually L. Variable costs rise and fall according to how much of the variable factors are employed. The higher the level of production, all things being equal, the higher the variable costs; and,
iii - total costs that include all fixed and variable costs or TC = TFC + TVC
Relationship between Types of Costs
Marginal cost (MC) will initially decline as output increases but eventually, assuming at least one fixed factor of production, the Law of Diminishing Returns sets in and marginal cost begins to rise. The MC curve will cut the average cost curve (AC) at its lowest point. Thus as long as MC < AC then AC falls; when MC = AC then AC will be at its minimum; when MC > AC then AC will increase
c) Cost in the Long-Run
Using the one fixed factor cost function, the long-run cost or expansion path of a firm is considered to be the sequence of short-run (SR) scenarios for varying scale of plant and equipment. In each SR scenario the scale of plant and equipment increases but during that period plant and equipment are consider to be fixed. The result is a set of average cost curve for each scale of production. An envelop curve can then be drawn representing the long-run (LR) minimum average cost at each level of output In the long run, however, a firm must cover all costs - fixed and variable - or it will go out of business. This occurs at point where marginal cost is equal to minimum average total cost. This is called the 'break even point'. At this point all factors of production - including entrepreneurship - are fully paid their opportunity cost. A firm thus maximizes its profits by producing at the point where price or revenue equals marginal cost of the last unit of output.
1. Micro economics by Mishra & puri