Holt 7525-9 S15_IT

Example 6A: If the price of Gadgets sold by Percomp Company (see Example 2) increases to
$15, the workers employed by Percomp will generate more MRP. For instance, Worker 4 would
now generate MRP of $180. If the price of Gadgets decreases to $5, the workers employed by
Percomp will generate less MRP. For instance, Worker 4 would now generate MRP of $60.
2. Factor productivity. An increase in factor productivity (MPP) will increase the MRP of the
factor, shifting the factor demand curve to the right. A decrease in factor productivity will
decrease the MRP of the factor, shifting the factor demand curve to the left.
Example 6B: If the MPP of Worker 4 (see Example 2) increases to 20 units, Worker 4 would now
generate MRP of $200. If the MPP of Worker 4 decreases to 5 units, Worker 4 would now
generate MRP of $50
3. Prices of related factors. A change in the price of a factor that is a substitute for or a
complement to the factor being examined will shift the demand curve for that factor. The
demand curve for a factor will shift in the same direction as the change in price for a substitute
factor and will shift in the opposite direction as the change in price for a complementary factor.
Example 6C: A decrease in the price of word processors would cause a decrease in the demand
for typewriters (a substitute factor). A decrease in the price of computers would cause an
increase in the demand for computer programmers (a complementary factor).
Value of the Marginal Product
The value to society of an additional unit of output is called the marginal social benefit. Marginal
social benefit is generally measured by the price of the product. What is the value to society of
the output produced by the marginal factor? The value to society of the output produced by the
marginal factor is called the value of the marginal product (VMP).
Value of the marginal product is equal to the price of the product times the MPP of the factor.
The price of the product indicates how greatly society values the product. The MPP of the factor
indicates how many additional units of the product the factor produces.
Example 7A: In Example 2, the price of the Gadgets is $10 and the MPP of Worker 3 is 16
Gadgets. Thus, the VMP of Worker 3 is $160.
Since the price of the output will always be greater than or equal to the marginal revenue of the
output, the VMP of a factor is always at least as great as the factor’s MRP. Thus, an employee
who generates $50,000 of MRP for his or her employer is also generating at least $50,000 of
VMP for society.
Example 7B: In Example 2, the MRP of Worker 4 is $120 (MR of $10 times MPP of 12 units).
The VMP of Worker 4 is also $120 (Price of $10 times MPP of 12 units).
Cost-Minimizing Combination of Factors
Producers will attempt to use the combination of factors that produces the desired output at the
minimum cost of production. To achieve the cost-minimizing combination of factors, producers
will consider factor productivity (MPP) for each factor and the price of each factor. At the costminimizing
combination of factors, the ratio of MPP to factor price will be the same for all factors.
Example 8: Alpha Co. employs two factors, Factor A and Factor B. The MPP of Factor A is 50
units. The MPP of Factor B is 100 units. The price of Factor A is $1. The price of Factor B is $10.
Is Alpha employing the cost-minimizing combination of Factors A and B? No. The ratio of MPP to
factor price is greater for Factor A (50 units per $1) than for Factor B (100 units per $10). Alpha
should employ more units of Factor A and fewer units of Factor B, until the ratio of MPP to factor
price is the same for both factors.
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Factor Markets 24 - 4