Pricing in Input Market

micro

Tell It by Myself…

Input prices are also determined by the forces of demand and supply. In this case, however, market roles are reversed.

It is a theory related to Marginal Productivity

We use $M{E}_K$ to represent marginal expense of a capital, and $M{E}_L$ to represent marginal expense of a labor.

So , to maximize the profit, we need

$M{E}_K=M{R}_K$

$M{E}_L=M{R}_L$

$MR$ means marginal revenue, it is so basic so I won’t tell again.

Usually we use $v$ and $w$ to represent the “price”, so

$v=M{E}_K=M{R}_K=M{P}_K\ast MR$

$w=M{E}_L=M{R}_L=M{P}_L\ast MR$

In this situation, we can find there are usually only 2 factors in the market, one is capital and one is rental price.

To find out the maximization utility, we come with Two-Variable Input Case

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The Input Market is quite different to Goods Market

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Sometimes we find that a firm may not act as a price taker , we assume in an extreme case that there is only one buyer (firm) which is the Monopsony.

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Reference