When all firms using input A are monopolists in their respective product markets, Da is obtained

step 1 The price that a monopolist charges at tends to be lower than the price of competitive market fi

When all firms using input A are monopolists in their...

When all firms using input $\mathrm{A}$ are monopolists in their respective product markets, $\mathrm{D}_a$ is obtained by a consideration of the firms' $\mathrm{MRP}_a$ curves and $(a)$ the internal effects only of a change in $\mathrm{P}_a,(b)$ the external effects only of a change in $P_{a *}$ (c) either the internal effects or the external effects, or $(d)$ both the internal and the external effects.

Key Concepts

Marginal Revenue Product (MRP)

The marginal revenue product represents the additional revenue a firm earns by employing one more unit of an input, calculated as the marginal product of the input multiplied by the price at which the output is sold. It is a key decision metric for firms when determining the optimal level of input usage, particularly in settings where firms have market power, as changes in output quantity can affect the product’s price and therefore the revenue from additional units of input.

Internal Effects

Internal effects refer to the changes that occur within a firm as a direct result of its own decisions regarding input usage or pricing. In the context of input demand, these effects capture the manner in which a firm's own production adjustments—such as a change in its own input price or output level—impact its marginal revenue product and subsequently its factor demand.

External Effects

External effects are the influences exerted by changes occurring outside a single firm's decision-making environment, such as shifts in the market or industry-wide variables. These effects can impact the marginal revenue product indirectly, for example, through changes in the overall market price of inputs or outputs, and must be considered when firms operate in an interconnected economic setting where their actions can affect and be affected by the behavior of other firms.

Factor Demand Derived from MRP

The demand for an input—often referred to as factor demand—is derived from the marginal revenue product curve. In settings where firms have market power, the factor demand is shaped by both the internal effects (direct responses to changes in a firm's own pricing strategy or input usage) and the external effects (market-wide influences such as shifts in competitors’ prices or overall market conditions). This dual consideration is essential to understand how monopolistic behavior in product markets can influence the input market.

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