Page 558 - Economics

CONFIRMING PAGES

PART SEVEN
490
Microeconomics of Resource Markets
TABLE 25.1 The Demand for Labor: Pure Competition in the Sale of the Product
(1) (2) (3) (4) (5) (6)
Units of Total Product Marginal Product Total Revenue, Marginal Revenue
Resource (Output) Product (MP) Price (2) (4) Product (MRP)
0 0 $2 $ 0
]——————–––—–7 ]—————––––––—–$14
1 7 2 14
]——————–––—–6 ]————––—––––—– 12
2 13 2 26
]——————–––—–5 ]——––———––––—– 10
3 18 2 36
]——————–––—–4 ]—————––––––—– 8
4 22 2 44
]——————–––—–3 ]———––——––––—– 6
5 25 2 50
]——————–––—–2 ]————––—––––—– 4
6 27 2 54
]——————–––—–1 ]————––—––––—– 2
7 28 2 56
of units of the resource applied to production and the successive unit adds more to the firm’s total revenue than
resulting total product (output). Column 3 provides the it adds to total cost.
marginal product (MP) , or additional output, resulting Economists use special terms to designate what each
from using each additional unit of labor. Columns 1 additional unit of labor or other variable resource adds to
through 3 remind us that the law of diminishing returns total cost and what it adds to total revenue. We have seen
applies here, causing the marginal product of labor to fall that MRP measures how much each successive unit of a
beyond some point. For simplicity, we assume that those resource adds to total revenue. The amount that each ad-
diminishing marginal returns—those declines in marginal ditional unit of a resource adds to the firm’s total (resource)
product—begin with the first worker hired. cost is called its marginal resource cost (MRC) .
In equation form,
Product Price But the derived demand for a resource
depends also on the price of the product it produces. Col- Marginal change in total (resource) cost

umn 4 in Table 25.1 adds this price information. Product resource ____________________________
unit change in resource quantity
price is constant, in this case at $2, because we are assuming cost
a competitive product market. The firm is a price taker and So we can restate our rule for hiring resources as
will sell units of output only at this market price. follows: It will be profitable for a firm to hire additional
Multiplying column 2 by column 4 gives us the total- units of a resource up to the point at which that resource’s
revenue data of column 5. These are the amounts of rev- MRP is equal to its MRC. If the number of workers a firm
enue the firm realizes from the various levels of resource is currently hiring is such that the MRP of the last worker
usage. From these total-revenue data we can compute exceeds his or her MRC, the firm can profit by hiring more
marginal revenue product (MRP) —the change in total workers. But if the number being hired is such that the
revenue resulting from the use of each additional unit of a MRC of the last worker exceeds his or her MRP, the firm is
resource (labor, in this case). In equation form, hiring workers who are not “paying their way” and it can
Marginal increase its profit by discharging some workers. You may
change in total revenue
revenue ____________________________ have recognized that this MRP MRC rule is similar to

product unit change in resource quantity the MR MC profit-maximizing rule employed throughout
our discussion of price and output determination. The ra-
The MRPs are listed in column 6 in Table 25.1 . tionale of the two rules is the same, but the point of refer-
ence is now inputs of a resource, not outputs of a product.
Rule for Employing Resources:
MRP MRC MRP as Resource Demand
The MRP schedule, shown as columns 1 and 6, is the Schedule
firm’s demand schedule for labor. To explain why, we must In a purely competitive labor market, market supply and
first discuss the rule that guides a profit-seeking firm market demand establish the wage rate. Because each firm
in hiring any resource: To maximize profit, a firm should hires such a small fraction of market supply, it cannot in-
hire additional units of a specific resource as long as each fluence the market wage rate; it is a wage taker, not a wage

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mcc26632_ch25_487-504.indd 490 9/8/06 1:09:46 PM