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Economics Lecture Fourteen (view source)

Revision as of 15:05, December 16, 2009

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→‎Review: Inputs to a Firm (Espec. Labor): nearly half done
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2.  "adjusting inputs to minimize the overall cost at a constant level of output"
 
2.  "adjusting inputs to minimize the overall cost at a constant level of output"
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:How does a firm adjust its inputs (e.g., workers or equipment) so that it has reached the lowest possible overall cost?  By making sure that he is getting the most "bang for his buck" for each input.  In other words, that each input is producing the most marginal product per dollar spent on that input.  If one worker is producing more than another worker, and both are being paid the same, then the owner has not lowered his costs to a minimum.  He could fire the lazy worker and hire a part-time worker like his good one, and then produce the same output at less cost.
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:Summarizing the above, the firm minimizes his overall costs by making sure the marginal product per cost for each input is equal.  If one input (e.g., one worker) is producing more marginal product per cost than another, then the overall costs are not minimized.  The unproductive worker is wasting the firm's money.
    
3.  "the effect of the minimum wage on the competition for labor"
 
3.  "the effect of the minimum wage on the competition for labor"
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4.  "comparing the cost of an input (usually labor) relative to the additional revenue that results"
 
4.  "comparing the cost of an input (usually labor) relative to the additional revenue that results"
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:This type of question probes how a firm increases its inputs in relation to the additional revenue that results from such an increase.  The key here is to be very careful and very logical.  A firm will increase an input (such as labor) until the ''value'' of the marginal product of that input equals the marginal cost of that input.  Read that sentence over and over until you understand it.  It simply means that the firm will equate the marginal cost of the additional input (such as an additional worker) to the marginal revenue that the additional input produces.
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:Often students miss this type of question because they are not careful to compare dollars to dollars.  If you have the marginal cost in terms of dollars (such as a wage rage for the additional worker), then you need to equate it to the marginal value of the marginal product of the labor (dollar units), not the marginal product itself (which is a quantity itself).
    
5.  "adjusting an input in response to an increase in the price of the product"
 
5.  "adjusting an input in response to an increase in the price of the product"
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