An important result of competitive factor markets is that, in equilibrium, factors are paid a wage equal to their Marginal Revene Product, as shown to the right.

    This gives a kind of efficiency known as allocative efficiency. By this we mean that resources are distributed or allocated in such a way that they are used as efficiently as possible. If W < MRP then labor is being under utilized. Hiring more labor would increase the value of labors output more than it would increase cost, to everyone's benefit. If W > MRP the labor costs more than the value of its output, so too much is being used.

Copyright © 1995-2004, Inc. - All Rights Reserved