No Bull Economics Lessons

Macroeconomics & Microeconomics Concepts You Must Know

Essential Questions

How do you calculate marginal revenue product?

Posted on April 18, 2014 at 10:20 AM Comments comments (0)

Marginal revenue product (MRP) is the change in total revenue divided by the change in quantity of inputs. You can also calculate the MRP by multiplying marginal product (AKA marginal physical product) by the marginal revenue.


MRP = Change in TR / Change in Inputs

or

MRP = MP x MR


AP Microeconomics Unit 3 Resource Markets

How do you calculate the profit-maximizing combination of economic resources?

Posted on April 18, 2014 at 10:15 AM Comments comments (0)

When a firm employs two types of resources, we can determine the profit-maximizing quantity of each input by using the following equation:

 

Marginal Revenue Product of Labor / Price of Labor = Marginal Revenue Product of Capital / Price of Capital = 1

 

The ratios must be equal to one. If you need the MRP / P to decrease, then hire more units of that resource. This is because of the law of diminishing marginal returns (as inputs hired increases, marginal product and marginal revenue product decreases).

 

If you need the MRP / P to increase, then hire fewer units of that resource.

 

AP Microeconomics Unit 3 Resource Markets

How do you calculate the cost-minimizing combination of resources?

Posted on April 18, 2014 at 10:00 AM Comments comments (0)

When a firm employs two types of resources, we can determine the cost-minimizing quantity of each input by using the following equation:


Marginal Product of Labor / Price of Labor  =  Marginal Product of Capital / Price of Capital


The ratios must equal one another. If you need the MP / P to decrease, then hire more units of that resource. This is because of diminishing marginal returns (as inputs hired increases, marginal product decreases).


If you need the MP / P to increase, then hire fewer units of that resource.


AP Microeconomics Unit 3 Resource Markets

How do you graph a perfectly competitive resource market and firm?

Posted on April 18, 2014 at 9:55 AM Comments comments (0)

When graphing perfectly competitive resource markets (such as labor), it is a good idea to graph the market for the resource and the firm hiring the resource side-by-side. The resource market sets the the equilibrium price of the resource (or wage for labor) and the firm takes the price of the resource ("wage taker") from the market.


The resource market consists of a downward sloping demand curve (AKA marginal revenue product) and an upward sloping supply curve. The households supply the resources and businesses demand the resources.


The firm is a "wage taker" so the supply curve is perfectly elastic. This represents the firm's marginal factor cost (AKA marginal resource cost). The firm's demand curve is a downward sloping marginal revenue product curve.


The No Bull Review graph below illustrates a perfectly competitive firm hiring its labor from a perfectly competitive labor market.


AP Microeconomics Unit 3 Resource Markets

How does the law of diminishing marginal returns work?

Posted on April 15, 2014 at 6:45 PM Comments comments (0)

The law of diminishing marginal returns states that as an additional worker is added to a fixed set of resources, the additional output produced by the new worker will decrease. In other words, the marginal product falls. To calculate the marginal product, divide the change in total product by the change in resources units.

 

According to the No Bull Review chart below, diminishing marginal returns begins after the second worker is hired. The marginal product falls from 24 units to 19 units as a result of employing the third worker.

AP Microeconomics Unit 2 Product Markets

What are the determinants of marginal revenue product?

Posted on April 14, 2014 at 8:00 PM Comments comments (0)

Marginal revenue product is equal to the demand for an economic resource. The shift factors of the downward sloping marginal revenue product curve are:


1. Product price and demand - If there is an increase in product demand, then there is more demand for the economic inputs used to make the product.

2. Productivity of the resource - If a resource is more productive, the firm wants to hire more (not less) of those resources to maximize profit.

3. Prices of substitute resources - If the price of a substitute resource decreases, then there will be less demand for the other resource.


AP Microeconomics Unit 3 Resource Markets


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