market economy. Traditional models of socialism were characterized by the replacement of factor markets with some kind of economic planning, under the assumption that market exchanges would be made redundant within the production process if capital goods were owned by a single entity representing society. Competitive factor markets Assume the structure of both the product and factor markets are perfectly competitive. In both markets firms are price-takers. The price is set at the market level through the interaction of supply and demand. The firms can sell as much of the product as they want at the set price since they are price-takers. The firm will hire a worker if the marginal benefits exceed the marginal costs. The marginal benefit is the marginal revenue product of labor or MRPL. The MRPL is the marginal product of labor (MPL) times marginal revenue (MR) or, in a perfectly competitive market structure, simply the MPL times price. The marginal revenue product of labor is the "amount for which [the manager] can sell the extra output [from adding another worker]". The marginal costs are the wage rate. The firm will continue to hire additional units of labor as long as MRPL > wage rate and will stop at the point at which MRPL = the wage rate. Following this rule the firm is maximizing profits since MRPL = marginal product of labor (MCL) is equivalent to the profit maximization rule of MR = MC. Determinants of resource demand The demand for inputs is a derived demand. That is, the demand is determined by or originates from the demand for the product the inputs are used to produce. The labor market demand curve is the MRPL curve. The curve shows the relationship between the quantity demanded and the wage rate holding the marginal product of labor and the output price constant. The units of labor are on the horizontal axis and the price of labor, w (the wage rate) on the vertical axis. The price of labor and the quantity of labor demanded are inversely related. If the price of labor goes up the quantity of labor demanded goes down. This change is reflected in a movement along the demand curve. The curve will shift if either of its components MPL or MR change. Factors that can affect a shift of the curve are changes in (1) the price of the final product or output price