Determine the profit maximizing price and quantity of resources in factor markets under perfect and imperfect competition by use of marginal analysis.

The demand for resources is derived from the demand for products and services, since most resources in their native form have little benefit. Businesses buy resources from households, who are the direct or indirect owners of land, labor, capital, and entrepreneurial resources, to produce the products and services that society desires. This is part of the circular flow model where businesses supply products that households demand and where businesses demand resources that households supply

Resource demand depends on the productivity of the resource in creating the good and also on the market value of the good produced. The production function relates the quantity of inputs used to produce a good to the quantity of output of that good.

Output Quantity

Production Function=÷

Input Quantity

Graph of the production function, showing the relationship of the quantity of product output over the quantity of resource input.

However, for a firm with fixed assets, the production function increases more slowly as the quantity of inputs increases.

Marginal product (MP) is the additional output that results when using an additional resource unit.

Output Change

Marginal Product=÷

Additional Input

When variable resources are applied to fixed resources or fixed assets, the marginal product diminishes as more additional resources are added, which is called, naturally enough, the principle of diminishing marginal product.

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