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

2. 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

3. 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

4. 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_______.

5. 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.

6. The demand for labour, marginal revenue product theory
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The demand for labour, marginal revenue product theory

7. 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

8. 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

9. 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.