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

Posted on April 18, 2014 at 9:55 AM

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

Categories: AP Microeconomics, Micro Unit 3 Resource Markets

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