Marginal Product of Labor

12 Key excerpts on "Marginal Product of Labor"

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  Newtonian Microeconomics

  A Dynamic Extension to Neoclassical Micro Theory

  • Matti Estola(Author)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Marginal productivity of labor measures average productivity from a marginal increase in use of labor (see Sect. 2.9). The value of marginal productivity of labor is obtained by multiplying the (physical) marginal productivity by the price of the product of the firm. Here the value of marginal productivity of labor is p k f 0 k (L k )(e=h). Example Let the price of the product of a firm be 10 (e=unit), and let the marginal productivity of labor be 100 (unit=h). What is, then, the value of marginal productivity of labor from: (a) 1 hour, (b) 10 minutes, (c) 8 hours? Answer. (a) 10 (e=unit) 100 (unit=h) D 1000 (e=h): (b) 1000 (e=h) D 1000 (e=60min) D 1000 (e=6 10min) D 1000=6 (e=10min): (c) 100 (unit=h) D (8=8) 100 (unit=h) D 800 (unit=8h)I 10 (e=unit) 800 (unit=8h) D 8000 (e=8h): ˘ The costs of the firm are assumed to consist of labor costs and fixed costs, and the cost function is then C k D C 0 C (1 C s)wL k . Thus we can no longer define the firm’s marginal costs as dC k =dq k like in Chap. 4, because now the flow of production does not exist in the cost function. On the other hand, we can analyze the dependence of weekly costs on the firm’s use of labor. §: By unit labor costs we understand the ratio between the costs of a firm and its use of labor in a time unit. ˘ §: By marginal costs of labor we understand the ratio between a change in the costs of a firm and a change in its use of labor in a time unit. Marginal costs of labor measure unit labor costs from a marginal increase in use of labor. ˘

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  eBook - ePub

  Modern Labor Economics

  Theory and Public Policy (International Student Edition)

  • Ronald G. Ehrenberg, Robert S. Smith(Authors)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Similarly, reducing the employment of labor or capital reduces a firm’s income flow because the output available for sale is reduced. Thus, the marginal income associated with a unit of input is found by multiplying two quantities: the change in physical output produced (called the input’s marginal product) and the marginal revenue (MR) generated per unit of physical output. We will therefore call the marginal income produced by a unit of input the input’s marginal revenue product. For example, if the presence of a tennis star increases attendance at a tournament by 20,000 spectators, and the organizers net $25 from each additional fan, the marginal income produced by this star is equal to her marginal product (20,000 fans) times the marginal revenue of $25 per fan. Thus, her marginal revenue product equals $500,000. (For an actual calculation of marginal revenue product in college football, see Example 3.1.) Marginal Product Formally, we will define the Marginal Product of Labor, or MP L, as the change in physical output (Δ Q) produced by a change in the units of labor (Δ L), holding capital constant: 1 MP L = Δ Q /Δ L (holding capital constant) (3.1) Likewise, the marginal product of capital (MP K) will be defined as the change in output associated with a one-unit change in the stock of capital (Δ K), holding labor constant: MP K = Δ Q /Δ K (holding labor constant) (3.2) Marginal Revenue The definitions in equations (3.1) and (3.2) reflect the fact that a firm can expand or contract its output only by increasing or decreasing its use of either labor or capital. The marginal revenue that is generated by an extra unit of output depends on the characteristics of the product market in which that output is sold. If the firm operates in a purely competitive product market, and therefore has many competitors and no control over product price, the marginal revenue per unit of output sold is equal to product price (P)

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  Labor Markets in a Global Economy: A Macroeconomic Perspective

  A Macroeconomic Perspective

  • Ingrid H. Rima(Author)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  The marginal productivity principle is central to such behavior on the demand side of the factor market. This is, however, not a universal principle of employer behavior, even though its validity is ingrained in the conventional wisdom as a basis for understanding how employment decisions are made in advanced capitalistic economies such as the United States. It is, in fact, a principle that has only limited real-world relevance because production functions in the core are increasingly characterized by fixed rather than variable proportions, either for engineering reasons or in consequence of workplace rules. When proportions are fixed, the marginal productivity of a factor is indeterminate. Nevertheless, the conditions under which the marginal productivity principle does apply are important in their own right, and they continue to be relevant in producing situations in which the proportions in which labor and capital are used are not fixed as is the case for firms operating in the periphery. Table 10.1 Hypothetical Input, Output, and Product Data: The Case of a Price Taker The Marginal Productivity Principle The Production Process Because profit maximization is a major objective of business firms, labor and other productive factors are employed only because they are expected to contribute to achieving this goal. In considering the employment of an additional worker at a given wage, wherever possible, a price-taking employer attempts first to evaluate how much another employee is likely to add to its total product and, second, how much the added product will contribute to total revenue. The addition to total product by an additional worker is what the economist terms marginal physical product (MPP). More specifically, marginal physical product is dq/dn, where dq is the change in output associated with the employment of an additional worker, dn

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  Intermediate Microeconomics

  • John H Hoag(Author)
  • 2012(Publication Date)
  • WSPC

    (Publisher)

  The primary concept we need from our earlier work is the marginal product. You will find the marginal product defined in definition 4.7. It is the slope of the total product curve (see definition 4.6). We obtain the total product from the production function and the marginal product from the total product. The production function represents the technology the firm has available, so the marginal product (MP) is also a representation of the technology. We generally expect that the MP will have a particular shape, eventually sloping downward. This is the Law of Diminishing Returns, which we state next (a repeat of definition 4.8).

  Definition 10.1: The Law of Diminishing Returns states that as we add more of a variable factor to fixed factors, eventually the marginal product of the variable factor will begin to decrease as the variable factor is increased.

  Note what the law says. It says that the MP will eventually fall. It does not say that the MP will eventually become zero, nor does it say that output will fall as the input increases. And the law is particularly vague about when this falling MP will start to happen. All the law says is that at some point, the MP will begin to fall. One might wonder why we think this law is likely to be true.

  The Law of Diminishing Returns is set in the short run where there is a fixed factor, and the fixed factor is the problem. When the firm wants to increase (or decrease) its output, it can do so by adjusting labor, but not the fixed factor, say the scale of plant. Consider this example. I have a basket-making business in my garage. I go out and collect reeds from the ditches by the road, bring them home, and dry them in the sun. I then take the reeds and weave them into a basket using no staples or other fastening devices. My labor is the variable input. My garage is the scale of plant. In my garage, I have a long bench where I weave the baskets. By myself, I make four baskets a day. Suppose that for some unknown reason, my baskets start to sell, and I hire someone else to help. This may be a really good thing. Now, there is someone to collect reeds most of the day, bring them back, and set them out to dry, while the other person weaves the reeds into baskets. So production rises by a lot; we more than double output. What happens when we hire a third person? If we had more space in the garage to assemble the baskets, the third person would be able to increase production by a large amount. But we do not have the space in the garage for both people to work. Hence, we gain some output, but the third worker does not add as much output as the second, and diminishing returns sets in.

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  Economics for Policy Makers

  A Guide for Non-Economists

  • Gustavo Rinaldi(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  In reality we can hardly attribute a specific worker’s contribution to the success of the firm and we often end up with average measurements. When production becomes very complex, measuring every worker’s precise contribution to production is very difficult, if not impossible. In some cases, this leads to the measurement of the productivity of teams, units and divisions.

  Labour productivity is only one of the criteria for determining wages; the bargaining power of the sides may play a key part in the definition of the shares of output that each part receives, notwithstanding their productivity. Salary ends up reflecting the marginal productivity of labour and its bargaining power.

  When firms produce more, their marginal productivity may change. If it grows, we say that there is increasing marginal productivity, if it diminishes, we say that there is diminishing marginal productivity, and if it remains constant, we can speak of constant marginal productivity. In reality it is frequent that, within a certain range, increases in production lead to increased marginal productivity but that in other ranges production increases lead to decreasing marginal productivity.

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  How should a ‘just reward’ be calculated?

  Writing in 2011, the economist John Kay raised two related key questions: How can the reward be shared when it is the result of the actions of many different persons? What are the main ways of resolving this problem?

  Economic theory developed at the end of the nineteenth century explained that everyone will tend be paid in proportion to their contribution to production. This contribution is called the marginal productivity of labour or of capital. Everybody will be paid proportionally to their marginal productivity. For this reason, the economy is intrinsically fair. There is not much to discuss. The free forces of the market reward everybody according to their merits.

  Other authors express a different opinion. According to them, the results of the production process will disproportionately be taken by the group (class) with greater force. Karl Marx, the most high-profile writer in that field, placed the answers within the broader theory of class struggle or class warfare. By the end of the twentieth century, Marx’s theories commanded little support within mainstream economics and it seemed that “neo-classical” theory (with measurable marginal productivity as one of its elements) would reign supreme. In subsequent years, however, new developments have reopened the discussion: for example, the fact that the compensation of top CEOs was 30 or 40 times the average wage of their employees in the 1930s, while more recently it has grown to several hundred times the average wage of employees. Remarkably, the insightful investor, Warren Buffett, made the following comment during a recent interview8

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  Farm Managerial Economics

  • Kumar, K Nirmal Ravi(Authors)
  • 2021(Publication Date)
  • Daya Publishing House

    (Publisher)

  Such imperfections in the labour market are due to weak bargaining power on the part of labour, absence of trade unions, less mobility of labour, entrepreneur’s may enjoy monopsonistic power, differences in skills and efficiencies of labour etc. A. Marginal Productivity Concept of Farm Labour Considering the above peculiar features of labour factor in contrast to other factors of production, it is justifiable to have a separate theory to analyze the pricing of labour factor. Let us analyze the determination of wages paid to labour through the concept of marginal productivity of labour factor. This concept emphasizes that, the entrepreneur generally employs the labour factor with higher marginal productivity and he substitute the labour with higher marginal productivity in place of the labour with lower marginal productivity. This concept is based on the following propositions: The marginal productivity of the labour determines the price (wage) of the labour. In the long run, the wages paid to the labour tends to equate to its Average Revenue Product (ARP) and Marginal Revenue Product (MRP). The point of optimal allocation of labour in the production programme is when the remuneration paid to the labour (MFC X ) equals the MRP. Assumptions This concept is based on the following assumptions: This ebook is exclusively for this university only. Cannot be resold/distributed. All the labour are homogenous, thereby, they are perfectly substitutable. The technology is given, though the scales and proportions of labour factor may change. There is perfect mobility of labour between different employments. There is perfect competition both in the labour market and product market. The marginal productivity of labour is measurable. The firm aims at profit maximization through efficient allocation of labour. This theory considers long run analysis, as the price paid to the labour tends to be equal to ARP and MRP. There is full employment equilibrium in the economy.

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  Microeconomics

  A Global Text

  • Judy Whitehead(Author)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  As a result, each additional unit of labour hired is augmenting the profit of the firm. Consequently, the advice in such a case is for the producer to continue expanding production by hiring more labour. • To the right of the equilibrium point e , VMP L < 1 w . As a result, the producer is now receiving less value (revenue) from the output of the last unit of labour hired than the producer has to pay that last unit. Hence, each additional unit of labour hired is reducing from the profit of the firm. Consequently, the advice in such a case is for the producer to reduce the amount of labour used. As the amount of labour hired is reduced the marginal productivity of labour rises. • It is only at the equilibrium point e , where VMP L = 1 w , that the firm’s profits are neither increasing nor decreasing. This is a stationary point. Here profits which have been increasing with the use of additional labour are maximized with the employment of L ∗ units of labour. After this, the additional cost of hiring labour exceeds the additional revenues generated by that labour, thus reducing profits. It is critical therefore, for a producer to be aware of, and to be able to identify, this point in the employment of labour. The total revenue–total cost approach An alternative method is to use the Total Revenue–Total Cost approach. This is done as follows: • Consider that profit maximization occurs when the difference between Total Revenue and Total Cost ( TR − TC ) is at the greatest. • When TR − TC is at its maximum, the slope of TR ( MR ) is equal to the slope of TC ( MC ). (Recall from Chapter 1 that the greatest distance between two curves is where their slopes are equal.) • Since MR is the value of marginal output ( VMP ) and marginal output comes only from labour in the short-run, then marginal revenue is the change in revenue resulting from a change in the quantity of labour used.

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  Fundamentals of Labor Economics

  • Thomas Hyclak, Geraint Johnes, Robert Thornton, , Thomas Hyclak, Thomas Hyclak, Geraint Johnes, Robert Thornton(Authors)
  • 2020(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  According to the marginal productivity theory, the employer’s demand schedule for labor is (under a certain set of conditions) equivalent to the marginal revenue product. Turning 10 This is so unless the factor is what we call an “inferior” factor. If this is the case, then the long-run demand for labor would be steeper than the short-run demand for labor. FIGURE 2.11 Marginal Revenue Product and the Long-Run Labor Demand Curve MRP and w L 1 L 2 L 4 L w 1 w 2 LRD A B D LRD MRP 1 Substitution Effect Scale Effects Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 38 Chapter 2 The Demand for Labor to the long run, we found that the employer’s long-run demand for labor was more elastic than short-run demand because other factors of production can be substituted for labor if the wage rate changes. In Chapter 3 we continue our treatment of labor demand, focusing on the elasticity of labor demand. We begin by analyzing several important measures of labor demand elasticity and then explain how we can deduce and estimate the magnitudes of these elasticities. KEY TERMS production function isoquant marginal rate of technical substitution (MRTS) Marginal Product of Labor law of diminishing returns value of the marginal product marginal revenue product exploitation budget constraint scale effects substitution effect output effect maximizing effect PROBLEMS 1. Use the following table, which shows Joe’s Barber Shop’s short-run production function, to answer the questions that follow. Number of Barbers Haircuts per Day AP MP VMP MRP 1 20 2 32 3 42 4 50 5 56 6 59 a.

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  Keynes's General Theory After Seventy Years

  • R. Dimand, R. Mundell, A. Vercelli, R. Dimand, R. Mundell, A. Vercelli(Authors)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  17. Post-Keynesian interpreters contend that this implies that the marginal product curve shows positions of market equilibrium. 1 This could be argued if prices generally were equal to marginal costs, as Keynes seems 197 198 Aggregate Demand, Employment and Equilibrium with Marginal Productivity to have supposed (with marginal costs rising). A suggestion can be found in Keynes’s Lectures. On p. 137, starting from the expression giving employment as a function of expected sales proceeds, Keynes proceeds to derive an equation showing price equal to the wage-bill times a markup expression divided by output. Under competitive conditions (with appropriate further assumptions) this would show price equal to or proportional to marginal cost, which would imply a corresponding relationship between the real wage and the Marginal Product of Labor. But while a discrepancy between the real wage and the marginal prod- uct, under competitive conditions, can be considered a disequilibrium, how the market moves to correct this is not spelled out. It is necessary to show how the equilibrium can be reached by market processes, given that labor will respond only to money wages. This is not easy to find in the literature. However, a simple diagram can help, though it will take some expla- nation. To develop it, we will start from the assumption of given plant and equipment, operating under diminishing returns to additional employment of labor (what Joan Robinson called a “utilization func- tion”). Initially we will take the money wage as given ... But to explain in what sense, we will have to explore Keynes’s conception of the labor market. The Marginalist account of the labor market When the General Theory was first published, many commentators, for example, Modigliani and Klein, simply assumed that the marginal- ist account of the labor market was broadly accurate, provided wages and prices were flexible.

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  The Economics Anti-Textbook

  A Critical Thinker's Guide to Microeconomics

  • Rod Hill, Tony Myatt(Authors)
  • 2010(Publication Date)
  • Zed Books

    (Publisher)

  L (or $2 per unit).

  In the long run, when all factors of production are variable, they are all hired up to the point where their marginal revenue product equals their factor price, PX = MR x MPX . Rearranging this expression gives the optimal combination of factors: MR = MP×/PX = MPY /PY , for factors of production X and Y. This is known as the ‘least cost rule’: the firm will hire every factor up to the point where the productivity of a dollar’s worth of every factor is equal.

  The least cost rule means that a change in one factor’s price will have ripple effects on the demand for all other factors of production. For example, a decrease in the real interest rate, r, makes capital cheaper. This generates two effects: first, firms respond by using more capital and less labour – a substitution effect; second, since costs have fallen, competitive supply curves shift right, leading to increased output – an output effect. The net effect on the position of the labour demand function depends on which effect dominates.

  1.3 Determination of wages in a perfectly competitive labour market

  To obtain the market demand for a particular type of worker, say welders, we must horizontally sum the MRP curves of all the firms across all the industries that employ welders, as shown in Figure 8.1 . The supply of a particular type of worker is normally depicted as upward sloping, reflecting the assumption that a higher wage is required to induce a greater supply of work time. The overall supply and demand for a particular skill (welding) determines the market wage. The firm then decides how many workers to hire by equating the wage to its MRP

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  Intermediate Microeconomics

  An Intuitive Approach with Calculus

  • Thomas Nechyba(Author)
  • 2018(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 254 CHAPTER 11 ONE INPUT AND ONE OUTPUT: A SHORT-RUN PRODUCER MODEL to a profit of €200 is tangential to the frontier of the producer choice set. Thus, production plan A is the profit-maximizing plan in this case. 11A.3.2 Marginal Product 5 w/p (or Marginal Revenue Product 5 w ) From panel (c) of Graph 11.5, at the profit-maximizing production plan A , the slope of the isoprofit curve (w/p) is equal to the slope of the production frontier, which is just the marginal product of labour MP ℓ . To see how this makes intuitive sense, it is useful for us to see the same profit-maximizing behaviour play out in a variant of the marginal product of labour graph that we derived from the production frontier in panel (b) of Graph 11.2. Panel (d) of Graph 11.5 begins by replicating the MP ℓ curve from panel (b) of Graph 11.2 with the verti-cal axis rescaled for graphing convenience, which makes it appear that the curve creates a hill that is ‘less steep’ than before. Recall that this is a graph of the slope of the production frontier in panel (a). Panel (e) of the graph plots a slight variant of the marginal product curve known as the marginal revenue product curve. While the marginal product of labour ( MP ℓ ) tells us the increase in output resulting from one more hour of labour being employed, the marginal revenue product of labour ( MRP ℓ ) tells us the increase in revenue resulting from one more hour of labour.

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  Workbook in Introductory Economics

  • Colin Harbury(Author)
  • 2014(Publication Date)
  • Pergamon

    (Publisher)

  The short period is defined as that during which at least one of the factors is fixed in supply. As units of a VARIABLE factor are used together with a fixed one, the MARGINAL PHYSICAL PRODUCT (M.P.P.) of the variable factor tends eventually to fall. This phenomenon is known as the LAW OF DIMINISHING RETURNS. It is attributed to the increasing difficulty of substitution with changing proportions as the fixed factor becomes scarce. The demand for a factor of production is the M.P.P. multiplied by the marginal revenue to the firm of the extra output — the MARGINAL REVENUE PRODUCT (M.R.P.). The quantity of a factor purchased by a firm depends, therefore, on its productivity and cost. A profit-maximizing firm will be in equilibrium for the production of a given output when the marginal revenue product of each factor is equal to the marginal cost of the factor. The least cost combination of inputs of two factors, A and B, is where—-—-—— = —-—-—— . In M. # C. A M.C.B conditions of perfect competition, when a firm is considered in isolation, M.R.P. is the same as M.P.P. multiplied by the price of the product (the VALUE OF THE MARGINAL PRODUCT, V.M.P.). When a firm is a monopolist in the market for its product, M.R. is less than price and M.R.P. is accordingly below V.M.P. When, however, a firm exerts monopoly power in the factor market, so that the price of a factor which it uses is affected by the quantity it buys, it is called a MONOPSONIST (single buyer) and the marginal cost of the factor is greater than its price. In the long run all factors can be varied, and there is no need for the proportions in which they are used to be changed. Productivity depends then on the SCALE OF PRODUCTION. If a percentage change in the quantity of all factors causes a smaller, equal or larger percentage change in total output, there are said to be DECREASING, CONSTANT or INCREASING RETURNS TO SCALE respectively.

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