AP Economics
Warm Up Question: There is an
economic recession! List and
explain at least five different
types of laborers that are losing
their jobs.
Do you remember this
economic model?
Consumers are
buying the g&s
these laborers
make!!
Labor will only
be hired
when…
Input Demand
• Derived Demand:
• The demand for resources (inputs)
is dependent on the demand for
the outputs those resources can be
used to produce
• We need more workers when their
good or service is in demand!
• What determines how much a person
is paid the service he/she provides?
– Skill needed, education level needed,
scarcity of talent, value society places
on output, number of consumers of
product, etc.
• Peyton Manning makes over $15,000,000
between his salary and endorsement deals;
a teacher working the same amount of
years makes just over $50,000. Why does
one earn more than the other?
A firm must determine:
1. how many units each worker
produces
2. how much is earned from each unit
produced
3. how much each unit costs to produce
A firm will never hire a worker who
costs more than he/she earns.
Marginal Product of
Labor (MPL):
• the additional output produced by
one additional unit of labor
• What do you expect to happen to the
MPL in the short run? Explain.
– Increase due to the fixed scale of
operations; more workers leads to
eventual inefficiencies.
Marginal Revenue
Product (MRP):
• The additional revenue a firm earns
by employing one additional unit of
input, ceteris paribus.
• MRPL = MPL × PX
{where PX is the price of the product}
Short Run Conditions:
Total Labor
Units
Total
Product
Marginal
Product
of Labor
Price (PX)
Marginal
Revenue
Product
(MPL × PX)
0
0
-
--
1
10
$.50
$5.00
2
25
$.50
$7.50
3
35
+10
+15
+10
$.50
$5.00
4
40
$.50
$2.50
5
42
+5
+2
$1.00
6
42
0
$.50
$.50
$0
When does a firm stop
hiring labor?
• RULE:
• a profit maximizing firm will add
inputs as long as the marginal
revenue product of that input is
equal to or exceeds the market
price of that input; MRPL ≥ PL
According to the chart above, if the
workers are being paid $4 per hour,
how many workers would be hired?
Total Labor Units
Marginal Revenue Product
0
-
1
2
$5.00
$7.50
3
$5.00
4
$2.50
$1.00
$0
5
6
ANSWER:
• 3 Workers!!
• This firm will keep hiring as long as
the MRPL is greater than (or equal to)
the wage paid to the laborer.
• In other words, keep hiring as long as
that worker’s output can cover the
cost of the hire.
Some Practice Problems
• A bookstore clerk
observes that for
each additional
security guard
hired, there is
some reduction in
the number of
books stolen. The
store devised the
following schedule:
# of
Guards
Total Value
of Books
Saved
MRPL
1
$800
$800
2
1,100
$300
3
1,300
$200
4
1,400
$100
5
1,450
$50
The security guards are paid $120 per day.
How many guards show this store hire?
Explain.
Workers
Apple
Bushels
/ day
MPL
MRPL
0
1
2
3
4
5
6
0
40
70
90
100
105
102
-
-
40
$80
30
60
20
40
10
20
10
-4
5
-2
• If apples sell
for $2 per
bushel and
workers can be
hired in a
competitive
labor market for
$30 per day.
• How many
workers should
be hired?
•What if workers unionized and the wage
rose to $50?