Marginal revenue product theory The demand for labour Marginal revenue product theory

The firm’s demand for labour is explained by the theory of marginal revenue product. (how much labour produces or MP X how much it brings to the firm in revenue or MR) MRP = MP x MR

The quantity of labour employed is determined by the point at which the marginal cost of employing one more worker is equal to the MRP How much the worker costs = (how much labour produces or MP X how much it brings to the firm in revenue or MR) MC = (MP x MR) Or MC = MRP

Marginal productivity theory. A closer look The marginal product of labour refers to the extra number of units added to output from the addition of an extra unit of labour. Initially the marginal product will increase with s__________ through the d_______ of l________. After a particular level of output, the marginal product will fall due to the onset of d__________ m___________ r_______.

Determining the equilibrium quantity of labour demanded Consider the following Perfect competition where marginal revenue is equal to the price received for the product. (MR=AR=P). In the following example £5. The firm can employ workers at a constant rate as workers are not differentiated through skills, qualifications or personal characteristics. In the following example £100 per week.

The demand for labour, marginal revenue product theory Go to excel worksheet The demand for labour, marginal revenue product theory

Deriving the labour demand curve Wage rate/MRP There are two possible labour quantity levels, A & B. Firms will choose B in order to maximise profits as workers generate MRP above MC to point B. The section of the demand curve that interests a firm is CD. C Wage (MC) A B MRP D Quantity of labour

Shifting the demand curve for labour Wage rate/MRP A rightward shift indicates a rise in MRP. This can arise through; An increase in MR (price of the product). An increase in MP (through training, improved use of capital equipment –IMR) MRP = D2 MRP = D1 Quantity of labour

The Individual firm’s demand for labour The following will impact upon a firm’s demand for labour The price of labour:- where wage rates rise in excess of productivity, there will follow a contraction in the demand for labour. Productivity:- increases in productivity will increase the MRP and make labour more attractive. The price of other factors of production:- reductions in the price of capital will see labour being substitute for capital. Supplementary labour costs:- as these costs increase, e.g. employer national insurance contributions, there may follow a reduction in the demand for labour.