marginal product of labor

Examples of marginal product of labor in the following topics:

• Marginal Product of Labor (Physical)

  • The marginal product of labor is the change in output that results from employing an added unit of labor.
  • In economics, the marginal product of labor (MPL) is the change in output that results from employing an added unit of labor.
  • When production is discrete, we can define the marginal product of labor as ΔY/ΔL where Y is output.
  • gives another example of marginal product of labor.
  • This table shows hypothetical returns and marginal product of labor.

• Marginal Product of Labor (Revenue)

  • The marginal revenue product of labor is the change in revenue that results from employing an additional unit of labor.
  • The marginal revenue product of labor (MRPL) is the change in revenue that results from employing an additional unit of labor, holding all other inputs constant.
  • The marginal revenue product of a worker is equal to the product of the marginal product of labor (MPL) and the marginal revenue (MR) of output, given by MR×MP: = MRPL.
  • Because the MRPL is equal to the marginal product of labor times the price of output, any variable that affects either MPL or price will affect the MRPL.
  • Define the marginal product of labor under the marginal revenue productivity theory of wages

• Deriving the Labor Demand Curve

  • Firms will demand labor until the marginal revenue product of labor is equal to the wage rate.
  • The additional revenue generated by hiring one more unit of labor is the marginal revenue product of labor (MRPL).
  • The marginal revenue product of labor (MRPL) is the additional amount of revenue a firm can generate by hiring one additional employee.
  • Changes to the marginal productivity of labor: Technology, for instance, may increase the marginal productivity of labor, shifting the demand curve to the right.
  • This has led to an increase in the marginal revenue product of labor for these jobs, shifting firms' demand for labor to the right.

• Marginal Revenue Productivity and Wages

  • In a perfectly competitive market, the wage rate is equal to the marginal revenue product of labor.
  • To determine demand in the labor market we must find the marginal revenue product of labor (MRPL), which is based on the marginal productivity of labor (MPL) and the price of output.
  • We know that a profit-maximizing firm will increase its factors of production until their marginal benefit is equal to the marginal cost.
  • Thus, workers earn a wage equal to the marginal revenue product of their labor.
  • The graph shows that a factor of production - in our case, labor - has a fixed supply in the long run, so the wage rate is determined by the factor demand curve - in our case, the marginal revenue product of labor.

• The Wage Rate

  • The marginal benefit of hiring an additional unit of labor is called the marginal product of labor: it is the additional revenue generated from the last unit of labor.
  • In theory, as with other inputs to production, firms will hire workers until the wage rate (marginal cost) equals the marginal revenue product of labor (marginal benefit).
  • Thus, shifts in the demand for labor are a function of changes in the marginal product of labor.
  • First of all, you can imagine that a new product or company is created that represents new demand for labor of a certain type.
  • Changes in the price of labor relative to other factors of production.

• Changes in Equilibrium for Shifts in Market Supply and Market Demand

  • Considering this tradeoff, workers collectively offer a set of labor to the market which economists call the supply of labor.
  • We have already seen that the demand for labor is based on the marginal product of labor and the price of output.
  • Thus, any factor that affects productivity or output prices will also shift labor demand.
  • The skills or education of the workforce (marginal productivity of labor)
  • All of the above may cause the demand for labor to shift and change the equilibrium quantity and price of labor.

• Conditions of Equilibrium

  • Equilibrium in the labor market requires that the marginal revenue product of labor is equal to the wage rate, and that MPL/PL=MPK/PK.
  • The marginal revenue product of labor (MRPL) is equal to the MPL multiplied by the price of output.
  • Firms use the marginal decision rule in order to decide what combination of labor, capital, and other factors of production to use in the creation of output.
  • To determine the marginal benefit of that dollar, we divide the marginal product of labor (MPL) by it's price (the wage rate, PL): MPL/PL.
  • The curved line represents the falling marginal product of labor, the y-axis is the marginal product/wage rate, and the x-axis is the quantity of labor.

• Marginal Productivity and Resource Demand

  • Firms will demand more of a resource if the marginal product of the resource is greater than the marginal cost.
  • The marginal product of a given resource is the additional revenue generated by employing one more unit of the resource.
  • In the case of labor, for example, the marginal product of labor is the additional value generated for the company by hiring one additional worker.
  • The same concept applies to all resources that can be used in production, whether its labor or wood or land.
  • If each firm has a positive marginal productivity of using more water in their manufacturing process, they will use more water since it's free (there is no, or limited, marginal cost).

• Marginal Productivity and Income Distribution

  • Demand for the type of workers that can provide positive marginal productivity over marginal cost will see an increase in their wages.
  • Firms will hire workers if the marginal productivity of the worker is greater than the marginal cost.
  • Suppose there are many firms with positive net marginal productivity of skilled labor.
  • Taken in aggregate, the marginal productivity of one type of worker influences the income that they earn in comparison to other types of workers.
  • Explain how the marginal productivity of different factors can affect income distribution

• Capital and Technology

  • Firms add capital to the point where the value of marginal product of capital is equal to the rental rate of capital.
  • Capital is a factor of production, along with labor and land.
  • It can be used to derive the marginal product for capital, which is the increase in the amount of output from an additional unit of capital.
  • The value of marginal product (VMP) of capital is the marginal product of capital multiplied by price.
  • Firms will increase the quantity of capital hired to the point where the value of marginal product of capital is equal to the rental rate of capital.