Input Demand: The Labour and
Land Markets
Chapter 10
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Firm and Household Decisions
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(Figure 10.1)
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Derived Demand
Derived demand is a demand for resources
(inputs) that is dependent on the demand for
the outputs those resources can be used to
produce.
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Inputs
The productivity of an input is the amount of
output produced per unit of that input.
Complementary inputs are factors of production
that can be used together to enhance each
other.
Substitutable inputs are factors of production
that can be used in place of each other.
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Marginal Product (MP) & Marginal
Revenue Product (MRP)
The marginal product of labour (MPL) is the
additional output produced by one additional
unit of labor.
The marginal revenue product (MRP) refers to
the additional revenue a firm earns by
employing one additional unit of an input,
ceteris paribus.
MRPL = MPL x PX
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Marginal Revenue Product per Hour of
Labour in Sandwich Production (Table 10.1)
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Deriving a Marginal Revenue Product
Curve from Marginal Product (Figure 10.2)
 The marginal revenue product
of labour is the price of output,
Px, times the marginal product
of labour, MPL.
 In competition, MRPL is the
market value of labour’s
marginal product.
 As long as output price is
constant, the MRPL curve has
the same downward slope as
the MPL curve.
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Marginal Revenue Product and Factor Demand
for a Firm Using One Variable Input (Labour)
(Figure 10.3)
A competitive firm using only one variable factor of production will use that factor
as long as its marginal revenue product exceeds its unit cost. A perfectly
competitive firm will hire labour as long as MRPL is greater than the going wage.
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The Two Profit-Maximizing Conditions Are
Simply Two Views of the Same Choice Process
(Figure 10.4)
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A Firm Employing Two Variable
Factors of Production
Suppose that the firm can vary its employment
of both labour and capital.
How can the firm’s demand for labour and
capital be characterized?
When more than one factor vary, we must
consider the impact of a change in one factor
price on the demand for other factors.
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Two Effects When the Price of an
Input Changes
The factor substitution effect is the tendency of
firms to substitute away from a factor whose
relative price has risen and toward a factor
whose relative price has fallen.
The output effect is the tendency of a firm to
increase output when the price of an input falls;
which in turn increases the demand for all
inputs.
These effects explain the downward sloping
input demand curve.
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Land Markets
 Land has perfectly inelastic supply; the supply is strictly
fixed.
 Demand-determined price refers to the price of a good
that is fixed in supply; it is determined exclusively by
what firms and households are willing to pay for the
good.
 Pure rent is the return to any factor of production that is
fixed in supply.
 The firm will use land up to the point where MRPH = PH
where H is land (hectares).
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The Firm’s Profit-Maximizing
Condition in Input Markets
PL = MRPL = (MPL x PX) Labour Market
PK = MRPK = (MPK x PX) Capital Market
PH = MRPH = (MPH x PX) Land Market
MPL = MPK = MPH
PL
PK
PH
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Input Demand Curves
Several factors contribute to shifts in input
demand curves:
demand for outputs
complementary and substitutable inputs
prices of other inputs
technological change
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Marginal Productivity Theory of
Income Distribution
At equilibrium, all factors of production end up
receiving rewards determined by their
productivity as measured by marginal revenue
product.
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Review Terms & Concepts
 complementary inputs
 demand determined price
 derived demand
 factor substitution effect
 marginal product of
labour (MPL)
 marginal productivity
theory of income
distribution
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 marginal revenue product
(MRP)
 output effect of a factor
price change
 productivity of an input
 pure rent
 substitutable inputs
 technological change
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