Starter
1. Explain what derived demand is.
2. Give 3 determinants of labour demand
and explain each.
3. Economic labour market articles
Aims and Objectives
Aims:
0 Analyse and Evaluate MRP theory.
Objectives:
0 Define MP, MR, and MRP.
0 Describe the relationship between MRP and Diminishing
marginal returns.
0 Explain the MRP curve.
0 Analyse shifts in the demand curve for labour.
0 Evaluate MRP theory.
Marginal Productivity Theory
The demand for labour depends on it’s marginal revenue
product.
MRP: the value of the physical addition to output arising
from hiring one extra worker or
F of P.
Where the marginal cost of hiring another worker equals its
MRP, the equilibrium qty of labour is established.
MRP
MRP = MP X MR
MP = Marginal Product is the number of extra
units of output a firm gains from one extra
unit of labour.
MR = Marginal Revenue is the amount of
extra revenue generated from one extra unit
of labour.
Diminishing Marginal Returns
Complete the table
Comment on any relationships you
notice
Draw a graph plotting number of
workers and MRP.
Comment on any relationships you
notice
Plot profit on the same graph and
comment.
Marginal
Marginal
No Of
Product (Total
Total
Marginal
Revenue Margina Total
Worker
Product x Product
Revenue Product (MR x l Cost Revenue
s
Total Product
MP)
y)
Total
Profit
Cost
1
12
12
5
60
100
60
100
-40
2
26
14
5
70
100
130
200
-70
3
50
24
5
120
100
250
300
-50
4
90
40
5
200
100
450
400
50
5
140
50
5
250
100
700
500
200
6
200
60
5
300
100
1000
600
400
7
254
54
5
270
100
1270
700
570
8
304
50
5
250
100
1520
800
720
9
340
36
5
180
100
1700
900
800
10
358
18
5
90
100
1790
1000
790
11
374
16
5
80
100
1870
1100
770
Diminishing Marginal Returns
Diminishing Marginal Returns
350
900
800
Marginal Revenue Product
300
700
600
250
500
200
400
Marginal
Revenue
Product
(MR x
MP)
300
150
200
100
100
0
50
-100
0
-200
1
2
3
4
5
6
7
8
No. Of
Workers
9
10
11
12
Profit
Diminishing Marginal Returns
0 After the employment of the second worker and up to the
employment of the ninth worker, each one adds more to
revenue than to cost.
0 After the employment of the ninth worker the situation is
reversed and each additional employee adds more to costs
than to revenue.
0 Why does it decrease?
0 Profit maximised at 9 people.
Marginal Revenue Product Curve
Wage Rate/
Marginal
Revenue
Product
Wage rate (MC2)
W2
Wage rate (MC1)
W1
MRP
Q2
Q1
Quantity of
Labour
Marginal Revenue Product Curve
0 Demand curve for labour
0 A firm will demand labour at the point where the MRP = MC
(Wage Rate)
0 Wage = W1 firm demands Q1
0 If wage rate rises to W2 demand for labour falls to Q2.
0 MRP rises at first until D.Returns sets in.
0 Firm will not be maximising profit at lower employment level,
as if it increases employment it can generate MRP over and
above the cost of employing them.
Peer Teaching
0 Prepare to teach the rest of the class in pairs the marginal
revenue product curve.
0 You must define MRP.
0 Explain what factors may lead to an increase in wage rates
from W1 to W2.
0 Draw the diagram.
Shifts in the Demand Curve for
Labour
0 How would increases or decreases in workers
productivity at the Toyota Car Assembly factory in
Derbyshire affect Toyota’s demand for labour?
Shifts in Demand Curve for
Labour
Wage Rate/
Marginal
Revenue
Product
To avoid ambiguity
demand curves are now
straight.
MRP = D2
MRP = D1
Quantity of
Labour
Shifting the Labour Demand
Curve
0 Shift to the right if the MRP of labour increases. (i.e. if
marginal product of labour/or marginal revenue
increases).
0 Eg. The demand for car assembly workers will
increase if the productivity of car assembly workers
rises. (increased training/price of output rises due to
increase in car demand).
Critique of MRP Theory
0 Brainstorm in pairs/groups any criticisms you have of
this theory.
A
D
Criticisms
C
B
Critique of MRP Theory
0 Measuring MRP is difficult.
0 Work is often carried out in teams which makes it
hard to identify to contribution to output of individual
workers.
0 Difficult to measure MP of workers in the tertiary
sector……how do you measure output of accountants?
Plenary
0 Define Marginal Product
0 Define Marginal Revenue Product
0 Draw a marginal revenue product curve.
0 Provide a criticism of this theory.