Scot Wick Blog

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 6  The Economics of Labor Markets

Chapter 18 of 36 – The Markets for the Factors of Production 

Section 7 of 24

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Table 1 here

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Figure 3 here

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Figure 3 – The Value of the Marginal Product of Labor

This figure shows how, using Table 1 data 

· the value of the marginal product, vertical axis of Figure 3, from column 4 data of Table 1

· depends on the number of workers, horizontal axis, column 1 

The curve slopes downward because of diminishing marginal product. 

For a competitive, profit-maximizing firm

· the value of marginal product curve 

· is also the firm 's labor demand curve

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How many workers will the apple company hire? 

In this case the market wage for apple pickers is $500 per week. 

Per Table 1, hiring the first three workers is profitable

· the first worker yields $1,000 in revenue, and $500 in profit 

· the second worker yields $800 in additional revenue, and $300 in profit

· the third worker yields $600 in additional revenue, and $100 in profit

After the third worker, hiring workers becomes unprofitable.

· the fourth worker would yield only $400 in additional revenue, and $100 in losses 

· the fifth worker would yield only $300 in additional revenue, and $300 in losses 

So, the firm hires only 3 workers.

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Figure 3 is a graph of the value of the marginal product. 

The curve slopes downward because 

· the marginal product of labor, column 3 

· diminishes as the number of workers rises, column 1

The figure includes a horizontal line at the market wage, here $500. 

To maximize profit, the firm

· hires workers up to the point

· where the two curves cross 

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With less than 3 workers level of employment

· the value of the marginal product is more than the wage

· hiring another worker would increase profit 

With more than 3 workers level of employment 

· the value of the marginal product is less than the wage

· hiring another worker would decrease profit 

So, a competitive, profit-maximizing firm hires workers up to the point where the value of the marginal product of labor equals the wage.

That point here is 3 workers and $500 wage

As a result, for a competitive, profit-maximizing firm

· the value of marginal product curve 

· is the firm’s labor demand curve.