- Firms demand inputs based on the demand for the outputs those inputs can produce. Inputs are complementary or substitutable, and subject to diminishing returns. - A firm will demand an input as long as its marginal revenue product exceeds its cost. For a single variable input like labor, the firm's demand curve is the marginal revenue product curve. - When a firm uses multiple variable inputs, a change in input price causes substitution and output effects that impact factor demand. The firm will substitute cheaper factors for more expensive ones.

1. Input Demand: The Labor and Land Markets

2. Firm Choices in Input Markets

7. Marginal Revenue Product Per Hour of Labor in Sandwich Production (One Grill) 5.00 .50 10 35 3 2.50 .50 5 40 4 1.00 .50 2 42 5 a The “price” is essentially profit per sandwich; see discussion in text. 0 .50 0 42 6 7.50 .50 15 25 2 5.00 $ .50 $ 10 10 1    0 0 (5) MARGINAL REVENUE PRODUCT ( MP L X P X ) (PER HOUR) (4) PRICE ( P X ) (VALUE ADDED PER SANDWICH) a (3) MARGINAL PRODUCT OF LABOR ( MP L ) (SANDWICHES PER HOUR) (2) TOTAL PRODUCT (SANDWICHES PER HOUR) (1) TOTAL LABOR UNITS (EMPLOYEES)

14. The Trade-Off Facing Firms