Individual Firm's Demand for Labour: Derivation using Marginal Revenue Product (MRP)
This section details how an individual firm determines its demand for labour. The key principle is that firms employ labour up to the point where the marginal revenue generated by the last unit of labour employed equals the marginal revenue product of that labour.
Key Concepts
Marginal Revenue Product (MRP): The additional revenue generated by employing one more unit of labour. MRP = Marginal Product of Labour (MPL) x Marginal Revenue (MR).
Marginal Product of Labour (MPL): The additional output produced by employing one more unit of labour, holding other inputs constant.
Marginal Revenue (MR): The additional revenue generated from selling one more unit of output.
The Derivation: MRP = MPL x MR
The firm will employ labour as long as the MRP is greater than or equal to the wage rate (W). If W > MRP, the firm will reduce its labour input. If W < MRP, the firm will increase its labour input.
The firmÔÇÖs demand for labour is derived from this fundamental relationship.
Graphical Representation
Suggested diagram: A graph with Labour on the Y-axis and Quantity of Labour on the X-axis. The MR curve slopes downwards, and the MPL curve typically initially rises and then falls. The firm's demand curve for labour is derived from the intersection of the MRP curve and the wage rate line.
The Firm's Demand Curve
The firm's demand curve for labour is derived from the MRP curve. It is typically derived from the MPL curve and the MR curve. The shape of the firm's demand curve depends on the relationship between the MPL and MR curves.
Quantity of Labour (L)
Marginal Product of Labour (MPL)
Marginal Revenue Product (MRP)
0
0
0
1
10
$10 x MR$
2
15
$15 x MR$
3
20
$20 x MR$
4
22
$22 x MR$
5
23
$23 x MR$
6
22
$22 x MR$
7
20
$20 x MR$
8
15
$15 x MR$
9
10
$10 x MR$
Factors Affecting the Firm's Demand for Labour
Changes in Productivity: An increase in productivity (MPL) will shift the MRP curve to the right, increasing the demand for labour. A decrease in productivity will shift the MRP curve to the left, decreasing the demand for labour.
Changes in Output Demand: An increase in the demand for the firm's output will increase the MR curve, shifting the MRP curve to the right and increasing the demand for labour. A decrease in the demand for the firm's output will decrease the MR curve, shifting the MRP curve to the left and decreasing the demand for labour.
Changes in the Price of Other Inputs: If the price of another input (e.g., capital) changes, it can affect the firm's demand for labour. For example, if capital becomes cheaper, firms may substitute capital for labour, reducing the demand for labour.
Changes in Technology: Technological advancements can increase productivity, leading to an increase in the demand for labour.
Conclusion
The MRP framework provides a powerful tool for understanding the individual firm's decision-making regarding labour input. By comparing the MRP to the wage rate, firms can determine the optimal level of employment to maximize profitability.