Derived Demand & What Shifts MRP
- Explain why labor demand is derived from product demand
- Compute marginal revenue product from a production schedule
- Identify what shifts the MRP curve and predict the effect on wages
Labor is wanted for what it produces
Nobody hires labor for its own sake. Demand for a factor is derived from demand for the output it makes — which means anything that changes the product market changes the factor market. If demand for houses collapses, demand for carpenters collapses with it, without anything happening to carpenters. This is the organizing idea of the unit, and it is why the factor market cannot be analyzed in isolation from the product market.
The hiring rule
Hire while MRP exceeds the wage, and stop where MRP = wage. This is the marginal decision rule again, with revenue product as the benefit and the wage as the cost. In a competitive labor market the firm takes the wage as given, so the MRP curve is the firm's labor demand curve — for any wage, it shows how many workers are worth hiring.
What shifts MRP
Three things. A change in the price of the output shifts MRP proportionally — a doubling of the product price doubles MRP at every quantity. A change in worker productivity, from training or better capital, shifts it right. And a change in the quantity of complementary capital raises MP and so raises MRP. Note what does not shift it: the wage. The wage determines where on the curve the firm operates, not where the curve sits.
A competitive firm sells output at $6. Marginal products of the first five workers are 12, 10, 8, 6, 4 units. The wage is $50. How many workers should it hire, and what happens if the output price rises to $9?
- 1.MRP at $6: 72, 60, 48, 36, 24.
- 2.Hire while MRP ≥ $50: workers 1 (72) and 2 (60). Worker 3 at $48 is below the wage.
- 3.So hire 2 workers at a price of $6.
- 4.At $9 the MRPs become 108, 90, 72, 54, 36.
- 5.Now workers 1 through 4 all have MRP above $50, so hire 4.
MRP uses marginal revenue, not price, whenever the firm has market power in its product market. A monopolist's MR is below price, so its MRP is below MP × P and it hires fewer workers than a competitive firm with identical technology.
Demand for labor is described as derived demand because it:
A firm in a competitive product market sees the price of its output rise. Its labor demand curve:
A firm should hire an additional worker whenever that worker's:
When a table gives total product, compute marginal product and then MRP as separate columns. Rubrics award the MRP column, and skipping straight to a hiring number forfeits that credit.
Answer the 3 checkpoints as you read.
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