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Summary Econ 2014 Chapter 12
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Summary of 5 pages for the course Economics at SUN (Chapter 12: Labour)
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Onafhanklik van Stellenbosch Universiteit/ Independent of Stellenbosch University
Economics 214 summary: Microeconomics
Chapter 12: Labour
A factor demand (for example labour demand) is a derived demand:
Page | 1
Demand for the input depends on, and is derived from, both the firm`s level of output and the cost of
inputs.
Marginal revenue product (MRP):
Additional revenue resulting from the sale of output created by the use of one additional unit of an input.
MRPL = (MR)(MPL)
Demand for labour in a perfectly competitive market:
MRPL = (MR)(MPL) = P(MPL)
MRPL ↓ when L ↑
Because there are diminishing marginal returns to labour, the marginal product of labour falls as
the amount of labour increases (MPL curve slopes downward). Thus the MRPL curve slopes
downward.
Profit maximizing amount of labour:
MRPL = w (profit maximizing condition)
If MRPL > w the firm should hire more workers
If MRPL < w the firm should lay off workers
MRPL curve is the demand for labour curve when all other inputs are fixed (for example capital)
Short run and long run demand curves for labour:
The demand for labour is more elastic in the
long run than in the short run, because capital inputs
are variable in the long run and thus firms can
substitute capital for labour in the production
process, which they cannot do in the short run
as capital inputs are fixed in the short run.
Do you struggle with Economics 214? We want to help you succeed. Contact us at queries@extraclassesstb.co.za or
visit our website at www.extraclassesstb.co.za.
, ExtraClassesStb 2014
...Helping you succeed
Onafhanklik van Stellenbosch Universiteit/ Independent of Stellenbosch University
Market demand for labour:
Page | 2
The market demand curve for a competitive firm, MRP1, takes the product price as given.
When the wage rate falls, all firms in the market employ more workers and thus produce higher
output.
The market supply curve shifts to the right leading to a decrease in the price of the product.
This leads to the firm`s demand curve shifting downward to MRP2.
Thus the market demand curve is more inelastic than the demand curve it would obtain if the
product price were assumed to be unchanged.
Demand for labour in an market with monopoly power:
MRPL = (MR)(MPL)
MRPL ↓ when L ↑
The marginal revenue curve as well as the marginal product curve is downward sloping, thus the
MRP curve is also downward sloping.
Profit maximizing amount of labour:
MRPL = w (profit maximizing condition)
If MRPL > w the firm should hire more workers
If MRPL < w the firm should lay off workers
Do you struggle with Economics 214? We want to help you succeed. Contact us at queries@extraclassesstb.co.za or
visit our website at www.extraclassesstb.co.za.
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