Marginal Revenue Product of Labor

11 Key excerpts on "Marginal Revenue Product of Labor"

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  eBook - PDF

  Labor and the Economy

  • Howard M. Wachtel(Author)
  • 2013(Publication Date)
  • Academic Press

    (Publisher)

  This measure is called the Marginal Revenue Product of Labor (MRP L ), which is the mar-ginal revenue received by the firm for the sale of a unit of output, multiplied by the marginal product of labor. At the margin the firm establishes its level of employment so that the wage rate is just equal to the Marginal Revenue Product of Labor. The latter is the firm's demand-for-labor curve. By doing this, the firm also maximizes its profits, because there is a direct connection between the firm's output decision, which maximizes its profits, and its employment decision. Mar-ginal revenue and marginal costs are equal when employment is set so that MRP L equals the wage. Changes in the demand for labor involve shifts in the entire MRP L curve. Such changes occur if the technology changes, the product market conditions change, or the price of some other factor of production changes. Changes in the market wage do not change the demand curve, but they do affect employ-ment in the firm. The extent to which employment is affected depends upon the elasticity of demand for labor in the firm. The more elastic the firm's demand for labor curve, the greater will be the reduction in employment in response to an increase in wages. The demand for labor is but one blade of the scissors. Understanding of the actual determination of the wage rate requires the derivation of the labor supply function. This is presented in the next chapter. CHAPTER 3 / WAGE THEORY: LABOR DEMAND 4 7 Study Questions 1 State precisely why the demand-for-labor curve slopes downward. Discuss the role of technology, and point out the economic assumptions made.

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  Microeconomics

  A Global Text

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

    (Publisher)

  But total output expands by the marginal product. Thus the marginal product (in units of output) must be multiplied by the marginal revenue (i.e. change in revenue per unit of output). The MRP L is the change in total revenue from selling the increased output from one additional unit of labour (e.g. labour hours). Hence MRP L is the net addition to the total revenue of the producer attributable to the addition of one unit of the variable productive factor. Like the Value of Marginal Product curve, the Marginal Revenue Product curve is downward sloping since it relates to the Marginal Physical Product ( MPP L ) curve. 402 SHORT-RUN FACTOR DEMAND 14.2 O w MRP L e VMP L = S L w – w – C H A P T E R 14 L * L Figure 14.3 Short-run demand for labour under monopoly in the product market This indicates that MRP L declines as employment of the variable factor increases. This is shown in Figure 14.3 . The quantity of labour that allows the monopolist to maximize profits is L ∗ . The monopolist will purchase the input until the Marginal Revenue Product is equal to the price of the input. This is similar to the equilibrium of the producer in a perfectly competitive market except that the equilibrium is now along the MRP L curve rather than the VMP L curve. It must be noted that the value of the marginal product lies above the marginal revenue product or: MPP L · MR < MPP L · P x This is because marginal revenue lies below price as: P x > MR For evidence, consider Figure 14.4. With the fall of price from P 1 to P 2 , output expands from Q 1 to Q 2 . But MR is not equal to the total revenue from selling an additional unit of output. Thus, MR is not equal to Q 1 LP 2 4 Q 2 , the area of additional revenue. Instead, MR (the change in total revenue) is the additional revenue area minus the loss from selling all the other units at the lower price.

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  Intermediate Microeconomics

  An Intuitive Approach with Calculus

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

    (Publisher)

  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. Since revenue is output times the price of the output p , MRP ℓ 5 pMP ℓ , the MRP ℓ curve is identical to the MP ℓ curve when the output price is €1 but is five times the MP ℓ curve when the price of the output is €5 as in the case of the door handles. Furthermore, while MP ℓ is measured in output units on the vertical axis in panel (d), MRP ℓ is measured in euro units in panel (e). The final panel (f) in Graph 11.5 shows how profit maximization first illustrated along the production frontier in panel (c) relates to profit maximization illustrated along the MRP ℓ curve. Along the production frontier, we noted that w/p 5 MP ℓ at the profit-maximizing plan A , which we could write differently by multiplying both sides of the equation by p , as w 5 pMP ℓ or just w 5 MRP ℓ . At the optimum, the wage paid for the last labour hour employed is just equal to the marginal euro benefit from that labour hour. Because marginal product declines, the MRP ℓ before the last one employed is larger than the wage that has to be paid. Panel (f) of Graph 11.5 shows the producer makes a loss on the first 22 labour hours employed, in each case paying a wage that is higher than the marginal euro benefit gained from each labour hour. However, starting with the 23rd labour hour, the marginal euro benefit of each hour employed is higher than the wage paid, until the producer stops employing when this marginal euro benefit, the MRP ℓ , is again equal to the wage rate.

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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)

  The TRP is the result of multiplying output (Q) times the price (P) at which that output could be sold. It represents the revenue that the firm would receive if it hired L workers. For example, employing three workers would result in $494 in revenue (TRP) for the firm. What would happen to revenue if a fourth worker were hired? The table shows that TRP would increase to $528. In other words, the change in TRP resulting from hiring a fourth worker would be $34. So what would the worth of the fourth worker be? That’s right, $34. The change in the total revenue product resulting from hiring one more worker is the marginal revenue product (MRP). If the wage you must pay is $90, how many workers will you hire? The answer is two. Only with two workers does the wage (the cost of labor) not exceed the MRP. If you hired a third worker, the cost of the third worker would be greater than the revenue that worker brings into the firm. In light of this discussion, can we generalize any further about the demand schedule for labor? We have already seen that in a competitive product or service market it is the value of the marginal product (VMP) that serves as the employer’s demand schedule for labor. And in a less-than-competitive market it is the marginal revenue product (MRP) that serves as the employer’s demand schedule. The VMP is the marginal product of labor multiplied by the price of the product, or MP 3 P. Although we won’t formally demonstrate it here, the MRP can be shown to be equal to the marginal product of labor multiplied by the marginal revenue in the product market, with marginal revenue being the change in total revenue resulting from the sale of one more unit of the product. In other words, MRP 5 MP 3 MR. In a perfectly competitive product market, price and marginal revenue are equal, so the MRP and VMP schedules are the same. Therefore, we can consider the MRP to be the de- mand for labor whether the product market is competitive or not.

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  eBook - ePub

  Macroeconomics

  (With Study Guide CD-ROM)

  • Jagdish Handa(Author)
  • 2010(Publication Date)
  • WSPC

    (Publisher)

  This Fact Sheet illustrates the shape of the output curve usually assumed in economics and relates it to the marginal product of labor. Marginal product is given by the slope of the production function at any one point. The slope is assumed to be always positive, meaning that marginal product of labor is always positive and that an increase in labor supply will always produce an increase in output. Notice the slope at point C is lower than at point B and lower still than at point A. This is indicative of the diminishing marginal product of labor, since at higher levels of labor, additional units will produce less and less output.

  Figure 7.1a shows the usual shape of the production function. Its positive slope indicates that it has positive MPL as employment increases. Its concave shape reflects diminishing MPL. The shape of the MPL curve corresponding to the shape of the production function in Figure 7.1a is shown in Figure 7.1b . This shape is often simplified in textbook macroeconomics to the downward sloping straight line shown in Figure 7.2a .

  The general shape of the MPL curve is shown in Figure 7.2b . Along this curve, the MPL first increases and then decreases. The production function corresponding to this shape of the MPL curve has initially increasing MPL, followed by a segment with diminishing MPL. Such a production function is often used in microeconomics, and we will use it in the growth theory Chapters 14 and 15 , but do not show it diagrammatically in this chapter.

  Mathematical Box 7.1: Examples of Production Functions and the Derivation of the Marginal Product of Labor

  The general procedure for deriving the MPL from the production function

  Suppose we are given a production function of the form:

  where α0 , α1 , and β are parameters. The procedure for deriving the MPL (which in calculus corresponds to taking the first derivative of y with respect to n ) is:

   

  (a) Take the first term (α0 n) on the right-hand side of the equation. Note that the exponent on n is 1. Multiply the coefficient in this term by the exponent on n, and change the exponent on n by subtracting 1 from the initial exponent. This gives (α0 • 1n1-1 ), which simplifies to α0

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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)

  n curve, when additional labor inputs are added, at lower wage rates, tells us intuitively that it represents a firm’s demand curve for the factor. It does not, of course, tell us how many units of a particular type of labor a firm would hire if it were confronted with such a demand curve. To determine this, it is necessary to know the money wage rate at which workers of a particular type can be hired. Given this information, the profit-maximizing level of employment for the price-taking firm can be determined.

  If we recall that a firm maximizes profit (minimizes losses) by producing the output at which marginal cost (i.e., the added cost of producing one more unit of output) equals marginal revenue, it will be readily understood that when labor is the only variable input this profit-maximizing rule is simply applied to its labor inputs. Thus, at any given money wage rate , a firm will maximize its gains (minimize its losses) if w = MRP < ARP n . That is, at a given wage rate and with a given selling price for its product, a price-taking firm will hire that number of workers at which the money wage rate it must pay its workers is equal to labor’s marginal revenue product, where the latter is equal to or less than the average revenue product. This is consistent with operating somewhere in zone II of Figure 10.1 .

  Figure 10.1

  Production with One Variable Input

  In the example given in Table 10.1 , seven labor units would be hired if w , the hourly wage rate, were $5.00. If fewer than seven persons were being employed at that wage rate, MRP n < w , and net proceeds could be increased by employing that number of workers at which MRP n = w . Thus, the most profitable volume of employment at an hourly wage of $7.50 would be six persons. At $3.50 per hour, however, it would be profitable to hire eight persons. It follows that the points on the MRP n curve, after labor’s marginal product has started to diminish , trace out the firm’s demand curve for labor. Given the money wage rate with which a price-taking firm is confronted, and the price at which it can sell its product, it is this curve that determines what the profit-maximizing (loss-minimizing) volume of employment will be. The prices at which price-taking firms can sell their outputs are the basis for computing the proceeds needed to cover the sum of their wage bills and the markups required for nonwage costs. It is by summing up the proceeds-employment combinations for all of the economy’s price-taking firms that it is possible (in principle) to generate that portion of aggregate supply functions identified as Z p in Figure 3.3 (p. 51

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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

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

    (Publisher)

  L ) equals the wage rate:

  MRPL

  = MR ·

  MPL

  = W (3.9)

  Now we can express the demand for labor in the short run in terms of the real wage by dividing equation (3.9) by the firm’s product price, P , to obtain

  M R

  P

  . M

  R L

  ⁢   ⁢ = ⁢    

  W P

  ⁢           (3.10)

  Since marginal revenue is always less than a monopoly’s product price, the ratio MR /P in equation (3.10) is less than one. Therefore, the labor demand curve for a firm that has monopoly power in the output market will lie below and to the left of the labor demand curve for an otherwise identical firm that takes product price as given. Put another way, just as the level of profit-maximizing output is lower under monopoly than it is under competition, other things equal, so is the level of employment.

  The wage rates that monopolies pay, however, are not necessarily different from competitive levels even though employment levels are. An employer with a product-market monopoly may still be a very small part of the market for a particular kind of employee and thus be a price taker

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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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  Micro Economic Analysis in Agriculture in 2 Vols

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

    (Publisher)

  The components of revenue productivity include, ARP, MRP and Marginal Value Product (MVP) or Value of Marginal Product (VMP). (a) ARP It refers to the ratio between TR and number of units or quantity of factor resource employed in the production programme. It is given by, ARP = (TR/n) = (TR/Q X ). (b) MRP It can be computed in two ways. Method 1 MRP is the additional revenue the firm gets by selling an additional unit of output. So, This ebook is exclusively for this university only. Cannot be resold/distributed. MRP = TR n –TR n-1 . So, MRP can be found by taking the difference between the TRs before and after selling the additional unit of output. For example, if the farmer sells 10 units of output at Rs. 20/unit, then TR = Rs 200. If the farmer sells 11 units of the same output at Rs. 19, then TR = Rs 209. So, MRP=209-200 = Rs. 9. In perfect competition, since additional output is sold by the firm at the same price, MRP is constant and it is equal to price or ARP of the product (Table 18.1). But, under imperfect competition, ARP or price>MRP (Table 18.3). Method 2 The MRP can also be studied as the net addition made to the TR due to the employment of an additional unit or quantity of a factor in the production programme, assuming other factors to be fixed at a given level of technology. So, MRP is obtained by multiplying the MPP with the MR. It is given by, MRP=MPP x MR. (c) MVP or VMP When MPP is expressed in its monetary terms, it is called MVP or VMP. It is calculated by multiplying MPP of the factor by the price of output. It is given by, MVP (or VMP)=MPP × P Y . For example, a farmer in a production programme employed two machines and 50 labourers to produce 1000 units of output. By employing two machines along with 51 labourers, if he produces 1005 units of output, then the MPP of additional unit of labour is five units of output. This additional five units of output produced by employing an additional unit of labour refers to MPP of labour resource.

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  Labor Markets and Employment Relationships

  A Comprehensive Approach

  • Joyce Jacobsen, Gilbert Skillman(Authors)
  • 2008(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  First, an increase in the output price P faced by the firm must shift the VMP L curve upward, and thus lead to an increase in its labor demand, represented as an increase in the firm’s quantity of labor demanded at each wage level for which demand is positive. Second, and similarly, if labor and capital are complementary factors of production, then an increase in the fixed level of capital must increase the marginal productivity of labor and thus increase the firm’s demand curve. K LABOR DEMAND 73 W 1 L 1 L 2 d 1 d W 2 Change in quantity demanded L W Change in demand Figure 2.9 Change in demand and change in quantity demanded. Finally, an improvement in the firm’s technology that increases the marginal prod-uctivity of labor must increase the firm’s demand for labor. The firm’s long-run labor demand Now consider the economic logic underlying a firm’s long -run labor demand curve, and the relationship of that curve to its short-run counterpart. Since the firm has more flexibility in adjusting its inputs, labor demand should in general be more elastic in the long run. As a first step in deriving the firm’s long-run labor demand curve, return to the profit maximization conditions described earlier. As in the short run, the first condition of profit maximization requires, given the other assumptions of the basic model, that the firm equate the market-determined wage rate to VMP L . This con-dition is just as in the short run, with the important difference that the capital input – and therefore the particular VMP L to be equated to the wage rate – is not fixed, but rather chosen by the firm. What level of capital input will the firm choose in the long run? The answer to this question comes from the same general profit maximization condition that marginal revenue must be equated to marginal cost.

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