Chapter Twenty-Six

Factor Markets

A Competitive Firms Input Demands

A

purely competitive firm is a pricetaker in its output and input markets. It buys additional units of input i until the extra cost of extra unit exceeds the extra revenue generated by that input unit. * MRPi( xi ) wi

A Competitive Firms Input Demands

For

the competitive firm the marginal revenue of a unit of input i is

MRPi( xi ) p MPi ( xi ).

A Monopolists Demands for Inputs

What

if the firm is a monopolist in its output market while still being a price-taker in its input markets?

A Monopolists Demands for Inputs

Suppose

the firm uses two inputs to produce a single output. The firms production function is y f ( x1 , x 2 ). So the firms profit is
( x1 , x 2 ) p( y)y w 1x1 w 2x 2 .

A Monopolists Demands for Inputs

y f ( x1 , x 2 ).
( x1 , x 2 ) p( y)y w1x1 w 2x 2 .

The profit-maximizing input levels are determined by

d (p( y)y) y w1 0 x1 dy x1
d (p( y)y) y w 2 0. x2 dy x2

and

A Monopolists Demands for Inputs

d ( p( y) y) y m * MRP 1 ( x1 ) MR( y) MP1 ( x* 1 ) w1 dy x1 d ( p( y) y) y m * MRP 1 ( x1 ) MR( y) MP2 ( x* 2) w2 dy x2

That is,

A Monopolists Demands for Inputs

d (p( y)y) y m * MRP 1 ( x1 ) MR( y) MP1 ( x* 1 ) w1 dy x1 d (p( y)y) y m * MRP 1 ( x1 ) MR( y) MP2 ( x* 2 ) w2 dy x2

That is,

d(p(y)y)/dy = MR(y) < p for all y > 0 so the marginal revenue product curve for a monopolists input is lower for all y >0 than is the marginal revenue product curve for a perfectly competitive firm.

A Monopolists Demands for Inputs

$/input unit
p MPi( xi )

MR( y) MPi( xi )

xi

A Monopolists Demands for Inputs

$/input unit
p MPi( xi )

MR( y) MPi( xi )

wi

xi

A Monopolists Demands for Inputs

$/input unit
p MPi( xi )

MR( y) MPi( xi )

wi

xi The monopolist demands fewer input units than does the perfectly competitive firm.

m x* i

c x* i