13.1 The Demand for Factors

Firms require the services of land, labour, and capital to be used as
inputs. Firms also use as inputs the products of other firms, such as steel,
legal services, computer software, and electricity.

Firms require inputs not for their own sake but as a means to produce
goods and services. For example, the demand for software engineers and
technicians is growing as more and more computers and software are
produced. The demand for carpenters and building materials rises and
falls as the amount of housing construction rises and falls. The demand
for any input is therefore derived from the demand for the goods and
services that it helps to produce; for this reason, the demand for a factor
of production is said to be a derived demand.

Marginal Revenue Product

What determines whether an individual firm will choose to hire one extra
worker, or whether the same firm will decide to use one extra machine, or
an extra kilowatt-hour of electricity? Just as a firm makes a profit-
maximizing decision to produce a level of output where the last unit
produced adds as much to revenue as to cost (where ), the
firm makes a similar decision about the quantity of a factor to employ. A
profit-maximizing firm will increase its use of any factor of production

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MR=MC