Chapter 17 Appendix DERIVED DEMAND.

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Presentation transcript:

Chapter 17 Appendix DERIVED DEMAND

The Firm’s Decision to Hire A profit maximizing firm hires a worker if the worker’s marginal revenue product (MRP) is greater than the wage that the worker will be paid. MRP or value of marginal product is the additional units of output that hiring an additional worker will bring about times the price at which the product will be sold. Labor productivity is the average product per worker, determined by dividing the total output by the number of workers.

Determining How Many Workers to Hire

Determining How Many Workers to Hire 18 16 14 12 10 8 6 4 2 Wage 24 28 30 32 34 36 20 $22 26 Marginal revenue product A B

Factors Affecting the Demand for Labor Changes in the demand for a firm’s product. If the price of the product increases, the demand for labor increases. The structure of the firm. Marginal revenue is less than price in all market structures except perfect competition, so marginal revenue product and demand for labor is less. Changes in other factors of production. Changes in costs and amounts used of other factors has an indeterminant effect on the demand for labor.

Cost Minimization Condition The firm will minimize the cost of a given output when the ratio of the marginal product to the price of the input is equal for all inputs.