An individual's supply of labor depends on his or her preferences for two types of “goods”: consumption goods and leisure. The intersection of the marginal revenue product curve with the market wage determines the number of workers that the firm hires, in this case 3 workers.Īn individual's supply of labor. The demand curve is downward sloping due to the law of diminishing returns as more workers are hired, the marginal product of labor begins declining, causing the marginal revenue product of labor to fall as well. When the marginal revenue product of labor is graphed, it represents the firm's labor demand curve. This figure graphs the marginal revenue product of labor data from Table along with the market wage rate of $50. The firm's profit‐maximizing labor‐demand decision is depicted graphically in Figure. For example, if the market wage rate is $50 per worker per day, the firm-whose marginal revenue product of labor is given in Table -would choose to hire 3 workers each day. The perfectly competitive firm's profit‐maximizing labor‐demand decision is to hire workers up to the point where the marginal revenue product of the last worker hired is just equal to the market wage rate, which is the marginal cost of this last worker. The market wage rate in a perfectly competitive labor market represents the firm's marginal cost of labor, the amount the firm must pay for each additional worker that it hires. In a perfectly competitive labor market, the individual firm is a wage‐taker it takes the market wage rate as given, just as the firm in a perfectly competitive product market takes the price for its output as given. The wage that the firm actually pays is the market wage rate, which is determined by the market demand and market supply of labor. The marginal revenue product of labor is the additional revenue that the firm earns from hiring an additional worker it represents the wage that the firm is willing to pay for each additional worker. The marginal revenue product of each additional worker is found by multiplying the marginal product of each additional worker by the market price of $10. The total product, marginal product, and marginal revenue product that the firm receives from hiring 1 to 5 workers are reported in Table. The firm faces a market price of $10 for each unit of its output. In a perfectly competitive market, the firm's marginal revenue product of labor is the value of the marginal product of labor.įor example, consider a perfectly competitive firm that uses labor as an input. The marginal revenue product of labor is related to the marginal product of labor. The marginal revenue product of labor (or any input) is the additional revenue the firm earns by employing one more unit of labor. When the firm knows the level of demand for its output, it determines how much labor to demand by looking at the marginal revenue product of labor. If demand for the firm's output falls, the firm will demand less labor and will reduce its work force. If demand for the firm's output increases, the firm will demand more labor and will hire more workers. The firm's demand for labor is a derived demand it is derived from the demand for the firm's output. Firms demand labor from workers in exchange for wages. Workers supply labor to firms in exchange for wages. The participants in the labor market are workers and firms. ![]() ![]() The demand and supply of labor are determined in the labor market. The two most common are labor and capital. ![]() Firms may choose to demand many different kinds of inputs. In addition to making output and pricing decisions, firms must also determine how much of each input to demand. Labor Demand and Supply in a Perfectly Competitive Market Labor Demand and Supply in a Perfectly Competitive Market.Equilibrium in a Perfectly Competitive Market.Monopolistic Competition in the Long-run.Demand in a Perfectly Competitive Market.Classical and Keynesian Theories: Output, Employment.
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