The Competitive Firms Demand for Inputs

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The Competitive Firms Demand for Inputs
ECO 105 Lecture 2.11 7 March 2007
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Production Processes

• Most production processes are
• Firms have some scope to
• How to choose the best
• The answer depends on both the
• Demand for inputs is a

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A Firms Demand for Labor

• Lots-o-Chips Cookie Company produces chocolate
  chip cookies.
• Already has a factory in place
• Uses a particular recipe material inputs
• How many workers should Lots-o-Chips hire?

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Some Concepts

• Production function - relates output to one
• Marginal product of labor (MPL) - addition to
  output
• Value of the marginal product of labor (VMPL) -

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Optimal Number of Workers

• VMPL is what another worker
• The wage is what another worker
• Rule Hire the worker if
• Note This is another application of our general
  rule -

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Changing Price

• If the price of a dozen cookies rises to 2.50,
  VMPL . . . and labor employed . . .
• If the price of a dozen cookies falls to 1.50,
  VMPL . . . and labor employed . . .

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VMPL, W, and the Firms Optimal Quantity of Labor

• If W rises to 72 per day, the quantity of labor
  hired . . .
• If W falls to 48 per day, the quantity of labor
  hired . . .
• Given W, we can read the quantity demanded of
  labor
• The VMPL curve is a competitive firms

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Generalizing Our Result

• We derive the demand for other inputs into
  production
• E.g., we use the marginal product of capital and
  the cost of capital to determine

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Review Time!