1. Labour Market
MRP Theory

2. Starter Explain what derived demand is.
Give 3 determinants of labour demand and explain each.
Economic labour market articles

3. Aims and Objectives Aims: Analyse and Evaluate MRP theory. Objectives:
Define MP, MR, and MRP.
Describe the relationship between MRP and Diminishing marginal returns.
Explain the MRP curve.
Analyse shifts in the demand curve for labour.
Evaluate MRP theory.

4. Marginal Productivity Theory
The demand for labour depends on it’s marginal revenue product. MRP: the value of the physical addition to output arising from hiring one extra worker or F of P. Where the marginal cost of hiring another worker equals its MRP, the equilibrium qty of labour is established.

5. MRP
MRP = MP X MR
MP = Marginal Product is the number of extra units of output a firm gains from one extra unit of labour. MR = Marginal Revenue is the amount of extra revenue generated from one extra unit of labour.

6. Diminishing Marginal Returns
Complete the table
Comment on any relationships you notice
Draw a graph plotting number of workers and MRP.
Comment on any relationships you notice
Plot profit on the same graph and comment.

7. Marginal Product (Total Product x - Total Product y) Marginal Revenue
No Of Workers
Total Product
Marginal Product (Total Product x - Total Product y)
Marginal Revenue
Marginal Revenue Product (MR x MP)
Marginal Cost
Total Revenue
Total Cost
Profit 1 12 5 60
100
-40 2 26 14 70
130
200
-70 3 50 24
120
250
300
-50 4 90 40
450
400
140
700
500 6
1000
600 7
254 54
270
1270
570 8
304
1520
800
720 9
340 36
180
1700
900 10
358 18
1790
790 11
374 16 80
1870
1100
770
378 20
1890
1200
690

8. Diminishing Marginal Returns

9. Diminishing Marginal Returns
After the employment of the second worker and up to the employment of the ninth worker, each one adds more to revenue than to cost.
After the employment of the ninth worker the situation is reversed and each additional employee adds more to costs than to revenue.
Why does it decrease?
Profit maximised at 9 people.

10. Marginal Revenue Product Curve
Wage Rate/
Marginal Revenue Product
Wage rate (MC2) W2
Wage rate (MC1) W1
MRP Q2 Q1
Quantity of Labour

11. Marginal Revenue Product Curve
Demand curve for labour
A firm will demand labour at the point where the MRP = MC (Wage Rate)
Wage = W1 firm demands Q1
If wage rate rises to W2 demand for labour falls to Q2.
MRP rises at first until D.Returns sets in.
Firm will not be maximising profit at lower employment level, as if it increases employment it can generate MRP over and above the cost of employing them.

12. Peer Teaching
Prepare to teach the rest of the class in pairs the marginal revenue product curve.
You must define MRP.
Explain what factors may lead to an increase in wage rates from W1 to W2.
Draw the diagram.

13. Shifts in the Demand Curve for Labour
How would increases or decreases in workers productivity at the Toyota Car Assembly factory in Derbyshire affect Toyota’s demand for labour?

14. Shifts in Demand Curve for Labour
Wage Rate/
Marginal Revenue Product
To avoid ambiguity demand curves are now straight.
MRP = D2
MRP = D1
Quantity of Labour

15. Shifting the Labour Demand Curve
Shift to the right if the MRP of labour increases. (i.e. if marginal product of labour/or marginal revenue increases).
Eg. The demand for car assembly workers will increase if the productivity of car assembly workers rises. (increased training/price of output rises due to increase in car demand).

16. Critique of MRP Theory
Brainstorm in pairs/groups any criticisms you have of this theory.
Criticisms A B C D

17. Critique of MRP Theory Measuring MRP is difficult.
Work is often carried out in teams which makes it hard to identify to contribution to output of individual workers.
Difficult to measure MP of workers in the tertiary sector……how do you measure output of accountants?

18. Plenary Define Marginal Product Define Marginal Revenue Product
Draw a marginal revenue product curve.
Provide a criticism of this theory.