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Learn why equilibrium wages equal the value of the marginal product of labour.
Consider how the other factors of production - land and capital - are compensated. Examine how a change in the supply of one factor alters the earnings of all other factors.
Supply
Supply
Demand
Demand
Quantity of Apples
The marginal product of labour is the increase in the amount of output from an additional unit of labour. MPL = Q/L MPL = (Q2 Q1)/(L2 L1)
Table 1: How the Competitive Firm Decides How Much Labour to Hire
Marginal Product of Labour MPL = Q/ L (Bushels per week) Value of the Marginal product of labour Marginal Profit
Wage
VMPL = P x MPL
$ 500
Profit = VMPL - W
0 1 2 3 4 5
0 100 100 80 180 60 240 40 280 20 300 200 500 -300 400 500 -100 600 500 100 800 500 300 $1000 $500 $500
Production function
180
100
Table 1: How the Competitive Firm Decides How Much Labour to Hire
Marginal Product of Labour MPL = Q/ L (Bushels per week) Value of the Marginal product of labour Marginal Profit
Wage
VMPL = P x MPL
$ 500
Profit = VMPL - W
0 1 2 3 4 5
0 100 100 80 180 60 240 40 280 20 300 200 500 -300 400 500 -100 600 500 100 800 500 300 $1000 $500 $500
The Value of the Marginal Product and the Demand for Labour
The value of the marginal product is the marginal product of the input multiplied by the market price of the output. VMPL = MPL P
The value of the marginal product (also known as marginal revenue product) is measured in dollars.
It diminishes as the number of workers rises because the market price of the good is constant.
The Value of the Marginal Product and the Demand for Labour
To maximize profit, the competitive, profitmaximizing firm hires workers up to the point where the value of the marginal product of labour equals the wage. VMPL = Wage The value-of-marginal-product curve is the labour demand curve for a competitive, profit-maximizing firm.
Market Wage
Supply
Equilibrium wage, W
Demand
Equilibrium employment, L
Quantity of Labour
Supply, S1 S2
W1 W2
Demand
L1
L2
3. and raises employment.
Quantity of Labour
Supply
W2
W1
2. increases the wage
D2
Demand, D1
L1
L2
3. and raises employment.
Quantity of Labour
The rental price is what a person pays to use a factor of production for a limited period of time.
Supply
Supply
Demand Demand
Quantity of Land
Quantity of Capital
A change in the supply of one factor alters the earnings of all the factors.
A change in earnings of any factor can be found by analyzing the impact of the event on the value of the marginal product of that factor.
Keywords
Factors of production Production function Marginal product of labour Diminishing marginal product Value of marginal product Capital Land
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