Download Firms will demand labor until the marginal revenue

Firms will demand labor until the marginal revenue product of labor is
equal to the wage rate.
LEARNING OBJECTIVES [ edit ]
Explain how a company uses marginal revenue product in hiring decisions
Explain the relationship between technological innovation and the demand for labor
KEY POINTS [ edit ]
The marginal revenue product of labor (MRPL) is the additional amount of revenue a firm can
generate by hiring one additional employee. It is found by multiplying the marginal product of
labor by the price of output.
Firms will demand labor until the MRPL equals the wage rate.
The demand curve for labor can be shifted by shifted by changes in the productivity of labor, the
relative price of labor, or the price of the output.
It will also change as a result of a change in technology, a change in the price of the good being
produced, or a change in the number of firms hiring the labor.
TERMS [ edit ]
marginal revenue product
The change in total revenue earned by a firm that results from employing one more unit of labor.
factor of production
A resource employed to produce goods and services, such as labor, land, and capital.
Give us feedback on this content: FULL TEXT [edit ]
Firms demand labor and aninput to production. The cost of labor to a firm is called the wage
rate. This can be thought of as the firm's marginal cost. The additional revenue generated by
hiring one more unit of labor is
themarginal revenue product of labor
(MRPL). This can be thought of as
the marginal benefit.
The marginal revenue product of labor
(MRPL) is the additional amount of
revenue a firm can generate by hiring one
additional employee. It is found by
multiplying the marginal product of labor
(MPL) - the amount of additional output
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one additional worker can generate - by
the price of output. If an employee of a customer support call center can take eight calls an
hour (the MPL) and each call earns the company $3, then the MRPL is $24.
We can use the MRPL curve to determine the quantity of labor a company will hire. Suppose
workers are available at an hourly rate of $10. The amount a factor adds to a firm's total cost
per period is the marginal cost of that factor, so in this case the marginal cost of labor is $10.
Firms maximize profit when marginal costs equal marginal revenues, and in the labor market
this means that firms will hire more employees until the wage rate (marginal cost of labor)
equals the MRPL. At a price of $10, the company will hire workers until the last worker hired
gives a marginal revenue product of $10 .
Marginal Product of Labor
The MPL falls as the amount of labor employed increases. The optimum demand for labor falls where the
real wage rate (w/P) is equal to the MPL.
Thus, the downward-sloping portion of the marginal revenue product curve shows the
number of employees a company will hire at each price (wage), so we can interpret this part
of the curve as the firm's demand for labor. As with other demand curves, the market
demand curve for labor is the sum of all firm's individual demand curves. Shifting the Demand for Labor
There are three main reasons why the demand curve for labor may shift:
1. Changes to the marginal productivity of labor: Technology, for instance, may increase
the marginal productivity of labor, shifting the demand curve to the right. For example,
computer technology has increased the productivity (marginal product) of many types of
workers. This has led to an increase in the marginal revenue product of labor for these
jobs, shifting firms' demand for labor to the right. This both increases the number of
employed workers and increases the wage rate.
2. The prices of other factors of production: The change in the relative price of labor will
increase or decrease demand for labor. For example, is capital becomes more expensive
relative to labor, the demand for labor will increase as firms seek to substitute labor for
capital.
3. The price of the firm's output: Since the price of the output is a component of MRPL,
changes will shift the demand curve for labor. If the price that a firm can charge for its
output increases, for example, the MRPL will increase. This is reflected in an outward
shift of the demand for labor.