How factor prices and productivity affect firms' costs of production and their choice of factor inputs
A firm's costs depend on two things: what it pays for its inputs and how much output those inputs produce. Higher wages or lower worker productivity both push costs up.
Formula
Unit Labour Cost = Wage Rate ÷ Labour Productivity
Real World
When Amazon raised its UK warehouse minimum wage to £12.50/hr but workers picked 20% more units per hour due to new robotics, the unit labour cost actually fell despite the pay rise.
Exam Focus
Always link factor price AND productivity together — stating only one earns partial marks on 'explain' questions.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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