Define the following terms and explain their importance to the study of economics.
a. Principle of marginal productivity
b. Marginal physical product
c. Marginal revenue product
d. Derived demand
e. Economic rent
What will be an ideal response?
a. The marginal productivity principle states that when factor markets are competitive, it always pays a profit-maximizing firm to hire the quantity of any input that makes the marginal revenue product equal to the price of the input. It is a very useful principle in explaining the demand for any input.b. Marginal physical product of an input is the increase in output that results from a one-unit increase in the use of the input, holding all other inputs constant. It is important in determining the demand for the input.c. Marginal revenue product of an input is the monetary value of the additional sales that a firm obtains by selling the marginal physical product of the input. In a perfectly competitive market, it is computed as MRP = MPP x Price of finished good. The portion of MRP which is downward sloping is demand for the input.d. The demand for any input is called a derived demand because it results from the underlying demand for the final product. The demand for the input is the downward-sloping portion of the MRP curve, which is the product of MPP and price of the final product (any change in final product price in turn shifts the input’s demand curve).e. Economic rent is the portion of the earnings of a factor of production that exceeds the minimum amount necessary to induce any of the factors to be supplied. It is payment above the opportunity cost of the factor. Some portion of income is often economic rent.
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In the aggregate demand and aggregate supply model, an increase in the growth rate of the velocity of money differs from an increase in money supply growth rate in that:
A. the SRAS curve will eventually shift back to its original position after an increase in money supply growth. B. the AD curve will eventually shift back to its original position after an increase in velocity growth. C. the SRAS curve will eventually shift upwards after an increase in velocity growth. D. the AD curve will eventually shift back to its original position after an increase in money supply growth.
As the Fed maintained interest rates at near zero during 2008-2012,
a. the economy recovered and the unemployment rate fell to normal levels. b. households and businesses held larger money balances and the velocity of money fell substantially. c. stock prices declined during 2010-2012, causing the economy to remain weak. d. the earnings senior citizens derived from saving deposits and other forms of savings rose substantially, leading to higher incomes and a strong increase in aggregate demand.