FIRM’S EQUILIBRIUM IN FACTOR EMPLOYMENT
We have already seen in chapter 19 how a finn achieves equilibrium in regard to a factor combination. A firm will be in equilibrium in this respect when it is combining the various factors of production in such a way that the marginal rate of technical substitution between any two factors is equal to their price ratio. In this way, the producer will be using the most economical combination or the least-cost factor combination. Thus. the linn will be in equilibrium in regard to the employment of factors of production when This is as regards using the most economical combination of the factors of production. But here the problem is different. Instead of finding the optimum factor proportion. the firm now wants to find out the ah.~ollltl· amounts of the factors of production which it should use or employ in order to be in equilibrium. III this connection. we may say that the various market situations are possible.(i) perfect competition ill both the factor market and the product market; (ii) perfect competition in the factor market but imperfect competition in the product market: (ii;) monopsony in the factor market but perfect competition in the product market. and (il’) monoposony in the factor market and monopoly in the product market. Since the entrepreneur is supposed to be rational, he will compare revenue and cost of utilizing an extra unit of a factor. If he finds that the marginal revenue ti.e. the additional income from the use of an additional unit of a factor) is greater than the cost of hiring it. he will use more of that factor. He will stop employing extra factor units when the marginal revenue product of the factor is equal to its marginal factor cost (i.e. MRP = MFC). We shall now discuss the employment of a factor of production (II) under perfect competition. and (b) under imperfect competition.
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