6 The Labour Market
03 January 2023 12:52
Micro Paper 1 - Markets and Market failure Page 1
, 6.1 The Demand for Labour, Marginal Revenue Product Theory
Firms demand labour to make the products they sell - derived demand e.g. if there is demand
for coffee there is a demand for baristas.
Marginal Physical Product of Output produced by each extra worker
Labour (MPPL)
Marginal revenue (MR) The additional revenue from selling one extra unit
Marginal Revenue Product of How much extra revenue an extra worker will bring into the
Labour (MRPL) firm
A rational, profit maximising firm will demand labour based on the amount of money it can earn
from that labour calculated using the MRPL
- If workers are more productive (higher MPP) or the MR increases, the MRP increases,
causing firms to hire more workers (demand more labour)
Demand = MRP
Downwards sloping demand curve equal to MRP
Firms must be making (super)normal profit
Law of diminishing marginal
returns
In a perfectly competitive market, MR is constant and therefore the gradient of MPP and MRP curves
are the same
Micro Paper 1 - Markets and Market failure Page 2
03 January 2023 12:52
Micro Paper 1 - Markets and Market failure Page 1
, 6.1 The Demand for Labour, Marginal Revenue Product Theory
Firms demand labour to make the products they sell - derived demand e.g. if there is demand
for coffee there is a demand for baristas.
Marginal Physical Product of Output produced by each extra worker
Labour (MPPL)
Marginal revenue (MR) The additional revenue from selling one extra unit
Marginal Revenue Product of How much extra revenue an extra worker will bring into the
Labour (MRPL) firm
A rational, profit maximising firm will demand labour based on the amount of money it can earn
from that labour calculated using the MRPL
- If workers are more productive (higher MPP) or the MR increases, the MRP increases,
causing firms to hire more workers (demand more labour)
Demand = MRP
Downwards sloping demand curve equal to MRP
Firms must be making (super)normal profit
Law of diminishing marginal
returns
In a perfectly competitive market, MR is constant and therefore the gradient of MPP and MRP curves
are the same
Micro Paper 1 - Markets and Market failure Page 2
