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The economics of labour markets

The factors of production are the inputs used to produce goods and services. Labour demand is a derived demand, because it is a factor of production. Let’s consider what a competitive and profit-maximizing firm would do. The production function is the relationship between the quantity of inputs used to make a good and the quantity of output of that good. The marginal product of labour is the increase in the amount of output from an additional unit of labour. Diminishing marginal product is the property whereby the marginal product of an input declines as the quantity of the input increases. The value of the marginal product is the marginal product of the input times the price of the output. A competitive, profit-maximizing firm hires workers up to the point where the VmpL equals the wage (and MC). Thus, the VmpL-curve i...

Posted by: Darren McCutchen

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