MRP and Derived Demand for Labour

Página 1

DERIVED DEMAND: for labour means that labour isn't demanded for its own sake but for the output it produces. Therefore the greater the demand for the product the greater the demand for the labour required to produce it

MARGINAL PHYSICAL PRODUCT (MPP): the addition to total output associated with employing an additional unit of labour

Labour isn't demanded for its own sake but for what it can produce or more specifically what the output can be sold for

If demand for the product increases or price of a product increases more labour will be employed to produce the additional output; eg demand for houses increase so building firms hire more bricklayers

This relationship between the demand for labour and the value of output produced by labour can best be illustrated by means of marginal revenue product theory

As each additional unit of labour is employed MPP increases due to greater scope for specialisation and division of labour (increasing returns)

In the short run however MPP eventually begins to fall due to to the fact that in the short run each successive unit of the variable factor has less of the fixed factor to work with

Eventually MPP will turn negative and total output will begin to fall

We are interested in the additional revenue earned after employing that additional unit of labour (MRP - Marginal Revenue Product)

CHARACTERISTICS OF A PERFECTLY COMPETITIVE LABOUR MARKET:

Many buyers and sellers of labour ie many firms and individuals

There are no barriers preventing someone from taking a job

Homogeneous labour (individuals have identical skills)

Perfect information about wages and availability of opportunities

Perfect mobility of labour (geographical and occupational)

THESE LINK TO LABOUR MARKET FAILURE AND AREN'T REALISTIC IN THE REAL WORLD L4 EVALUATION MRP THEORY

Assuming a perfectly competitive goods market then the selling price will be constant and if we assume perfect competitive labour market where all workers are wage takers, this implies that the supply curve for labour is perfectly elastic.

The Average Revenue Product (ARP) rises when MRP is above it pulling it up and then falls when MRP is below it pulling it down

At MC = MR the profit/loss associated that particular quantity of labour will be represented by the difference between the AC and the AR curve. You should be able to see from the diagram that if AC is above the AR curve then a loss would be inevitable

Where the AC curve first touches the top of the ARP curve no profit or loss will be incurred. At all wage levels below this point the AC curve will fall below the ARP curve and labour can be profitably employed