1
UNIT—5
LABOUR MARKETS
Labour market: A labour market is a market where individuals provide their
labour to businesses in exchange for a wage or a salary. The term labour market
can be broadly referred to the entire workforce of an economy, but it can also
refer to labour markets in a given industry or for a particular geographic region.
Derived demand: Unlike the goods, the labour does not satisfy the wants of
the people directly. The labour is demanded not because it directly satisfies the
wants of the people who wish to buy them. Instead, labour is demanded because
it can be used to produce consumer goods which in turn satisfies human wants.
Therefore, demand for labour, like that of other factors of production is called
derived demand. It is derived from the demand of the products it helps to
produce. Thus, the demand for labour ultimately depends upon the demand for
goods it helps to produce. The greater the demand from goods which a
particular type of labour helps to make, the greater the demand for that type of
labour.
Marginal Revenue Product (MRP): Marginal Revenue Product is the
increment in the total value product caused by employing an additional unit of a
factor, the expenditure on the other factors remaining unchanged. In other
words, MRP is the Marginal Physical Product (MPP) of the factor multiplied by
the marginal revenue (MR). Here, we use the word Marginal Physical Product
instead of marginal product to emphasis that it is measured in physical units or
numbers. Thus, MRP = MPP x MR.
The Marginal Revenue Product is often termed as marginal product or marginal
productivity.
Value of Marginal Product (VMP): means the marginal physical product of
the factor multiplied by the price of the product i.e., average product.
VMP= MPP x Price (or AR)
Marginal Factor Cost (MFC): is the change in total cost resulting from the
employment of one more or one less unit of the variable factor.
To illustrate, let us consider the numerical examples presented in the table
below. We take a case of a farmer who is operating in a perfectly competitive
, 2
factor and product markets where his only variable factor of production is the
labour.
I II III IV V VI VII
Units Total Marginal Price of Value of Total Revenue Marginal
of a output physical product marginal Revenue
factor (Q) product (P) product Product
(MPP) (VMP) (Q x P) (MRP)
(MPP x P)
1 25 25 2 50 50 50
2 70 45 2 90 140 90
3 110 40 2 80 220 80
4 145 35 2 70 290 70
5 172 27 2 54 344 54
6 191 19 2 38 382 38
7 199 8 2 16 398 16
8 199 0 2 0 398 0
In the above table, the price of the product is R.2 for an individual firm remains
the same for all the levels of its output. As more units of labours are employed,
total output is increasing but at a diminishing rate. When one unit of labour is
employed, the marginal physical product is 25. Since the price of the product is
Rs.2 the value of marginal product will be Rs.2 x 25 = 50 and so for the
subsequent units of labour. It can be noticed from col. V that value of Marginal
product is declining as more units of labour are employed after a second unit.
This is because marginal physical product is declining due to the operation of
the law of diminishing returns. The marginal revenue product (MRP) of a factor
can be found out from col.VI which shows the total revenue at various levels of
output. When two units of labour are employed, total revenue is Rs.140 which is
obtained by selling 70 units of output produced by 2 units of labour at price
Rs.2 per unit. When another unit of labour is employed, the total output is 110
and total revenue obtained is Rs. 220. Thus, this additional unit of labour has
added Rs.80 (Rs. 220-Rs.140) to the firm’s total revenue, MRP of labour at this
stage is therefore, Rs.80. Likewise, MRP of labour can be calculated.
Demand for labour: The demand for labour shows how many workers the
firms are willing and able to hire at a given time and wage rate. The demand for
labour depends on the prices of the co-operative factors. The greater the demand
for co-operating factors the greater will be the demand for labour. The demand
UNIT—5
LABOUR MARKETS
Labour market: A labour market is a market where individuals provide their
labour to businesses in exchange for a wage or a salary. The term labour market
can be broadly referred to the entire workforce of an economy, but it can also
refer to labour markets in a given industry or for a particular geographic region.
Derived demand: Unlike the goods, the labour does not satisfy the wants of
the people directly. The labour is demanded not because it directly satisfies the
wants of the people who wish to buy them. Instead, labour is demanded because
it can be used to produce consumer goods which in turn satisfies human wants.
Therefore, demand for labour, like that of other factors of production is called
derived demand. It is derived from the demand of the products it helps to
produce. Thus, the demand for labour ultimately depends upon the demand for
goods it helps to produce. The greater the demand from goods which a
particular type of labour helps to make, the greater the demand for that type of
labour.
Marginal Revenue Product (MRP): Marginal Revenue Product is the
increment in the total value product caused by employing an additional unit of a
factor, the expenditure on the other factors remaining unchanged. In other
words, MRP is the Marginal Physical Product (MPP) of the factor multiplied by
the marginal revenue (MR). Here, we use the word Marginal Physical Product
instead of marginal product to emphasis that it is measured in physical units or
numbers. Thus, MRP = MPP x MR.
The Marginal Revenue Product is often termed as marginal product or marginal
productivity.
Value of Marginal Product (VMP): means the marginal physical product of
the factor multiplied by the price of the product i.e., average product.
VMP= MPP x Price (or AR)
Marginal Factor Cost (MFC): is the change in total cost resulting from the
employment of one more or one less unit of the variable factor.
To illustrate, let us consider the numerical examples presented in the table
below. We take a case of a farmer who is operating in a perfectly competitive
, 2
factor and product markets where his only variable factor of production is the
labour.
I II III IV V VI VII
Units Total Marginal Price of Value of Total Revenue Marginal
of a output physical product marginal Revenue
factor (Q) product (P) product Product
(MPP) (VMP) (Q x P) (MRP)
(MPP x P)
1 25 25 2 50 50 50
2 70 45 2 90 140 90
3 110 40 2 80 220 80
4 145 35 2 70 290 70
5 172 27 2 54 344 54
6 191 19 2 38 382 38
7 199 8 2 16 398 16
8 199 0 2 0 398 0
In the above table, the price of the product is R.2 for an individual firm remains
the same for all the levels of its output. As more units of labours are employed,
total output is increasing but at a diminishing rate. When one unit of labour is
employed, the marginal physical product is 25. Since the price of the product is
Rs.2 the value of marginal product will be Rs.2 x 25 = 50 and so for the
subsequent units of labour. It can be noticed from col. V that value of Marginal
product is declining as more units of labour are employed after a second unit.
This is because marginal physical product is declining due to the operation of
the law of diminishing returns. The marginal revenue product (MRP) of a factor
can be found out from col.VI which shows the total revenue at various levels of
output. When two units of labour are employed, total revenue is Rs.140 which is
obtained by selling 70 units of output produced by 2 units of labour at price
Rs.2 per unit. When another unit of labour is employed, the total output is 110
and total revenue obtained is Rs. 220. Thus, this additional unit of labour has
added Rs.80 (Rs. 220-Rs.140) to the firm’s total revenue, MRP of labour at this
stage is therefore, Rs.80. Likewise, MRP of labour can be calculated.
Demand for labour: The demand for labour shows how many workers the
firms are willing and able to hire at a given time and wage rate. The demand for
labour depends on the prices of the co-operative factors. The greater the demand
for co-operating factors the greater will be the demand for labour. The demand
