Equation 13-2 states that a profit-maximizing competitive firm will
employ additional units of the factor up to the point at which the MRP
equals the price of the factor. For example, in Figure 13-1 , if the price of
hiring one unit of the factor were $2000 per month, the profit-maximizing
firm would employ 60 units of the factor. However, if hiring an extra unit
of the factor cost $3000 per month, the firm would only choose to hire 45
units. It should be clear that since the MRP curve shows how many units
of the factor will be hired at different factor prices, the factor’s MRP curve
is the firm’s demand curve for the factor.
A competitive firm’s demand curve for a factor is given by that factor’s MRP curve.This logic applies equally to any factor of production. A profit-maximizing
farmer will rent land up to the point where the marginal revenue product
from an extra hectare of land is just equal to the rental price for that
hectare of land. A profit-maximizing machine-tools manufacturer will use
extra machines (capital) until the marginal revenue product from an extra
machine just equals the price of using that machine. And a profit-
maximizing paper mill will hire workers up to the point where the
marginal revenue product of an extra worker is just equal to that worker’s
wage.
Deriving a competitive firm’s demand curve for any variable factor is a
little complex—we have to think about diminishing marginal returns, the
factor’s price, the marginal product, and the market price at which the
firm can sell its product. Practising with examples can make it clearer. Try