Marginal Productivity

Theory

Marginal Physical Product

Extra Output from each additional unit of resource

Marginal Revenue Product

Price x Extra OutputChange in Total Revenue Resulting from the use of

each additional unit of resource

See Overhead 4.3

Perfect competitionAdding one variable

resource – laborColumns 3 and 6

demonstrate the law of diminishing returns

Law of Diminishing Returns

As successive increments of a variable resource (labor) are added to a fixed resource, the marginal product of the variable resource will eventually decrease.

Marginal Resource Cost

Amount which each additional unit of

resource adds to a firms total (resource)

cost

MRP=MRC Rule

It is profitable for a firm to hire additional units of a resource up to that

point at which that resources MRP=MRC

MRP=MRCand

MR=MCRationale the same

BUT point of referenceis now inputs of a

resource

Purely Competitive Labor Market

Wage rate established by market supply and

demandFirm is a wage taker

Imperfect Labor Market

Firm is a price maker Pure monopoly, oligopoly,

monopolistic competition Downward sloping demand

curve

MRP of competitive seller falls for one

reason:

Marginal Product diminishes

MRP of Imperfectly competitive seller falls for

two reasons:

1- Marginal Product diminishes

2- Product price falls as output increases

Conclusions

For review check out chapter 27

pages 564-569Tables 27-1 and 27-2

same as overheads