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Labour Market. MRP Theory. Starter. Explain what derived demand is. Give 3 determinants of labour demand and explain each. Economic labour market articles. Aims and Objectives. Aims: Analyse and Evaluate MRP theory. Objectives: Define MP, MR, and MRP. - PowerPoint PPT Presentation
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Labour MarketMRP Theory
Starter
1. Explain what derived demand is.
2. Give 3 determinants of labour demand and explain each.
3. Economic labour market articles
Aims and Objectives
Aims: 0Analyse and Evaluate MRP theory.
Objectives:0Define MP, MR, and MRP.0Describe the relationship between MRP and Diminishing
marginal returns.0Explain the MRP curve.0Analyse shifts in the demand curve for labour.0Evaluate MRP theory.
The demand for labour depends on it’s marginal revenue product.
MRP: the value of the physical addition to output arising from hiring one extra worker or F of P.
Where the marginal cost of hiring another worker equals its MRP, the equilibrium qty of labour is established.
Marginal Productivity Theory
MP = Marginal Product is the number of extra units of output a firm gains from one extra unit of labour.
MR = Marginal Revenue is the amount of extra revenue generated from one extra unit of labour.
MRP
MRP = MP X MR
Diminishing Marginal Returns
Complete the table
Comment on any relationships you notice
Draw a graph plotting number of workers and MRP.
Comment on any relationships you notice
Plot profit on the same graph and comment.
No Of Worker
s
Total Product
Marginal Product (Total
Product x - Total Product
y)
Marginal Revenue
Marginal Revenue
Product (MR x MP)
Marginal Cost
Total Revenue
Total Cost
Profit
1 12 12 5 60 100 60 100 -40
2 26 14 5 70 100 130 200 -70
3 50 24 5 120 100 250 300 -50
4 90 40 5 200 100 450 400 50
5 140 50 5 250 100 700 500 200
6 200 60 5 300 100 1000 600 400
7 254 54 5 270 100 1270 700 570
8 304 50 5 250 100 1520 800 720
9 340 36 5 180 100 1700 900 800
10 358 18 5 90 100 1790 1000 790
11 374 16 5 80 100 1870 1100 770
12 378 4 5 20 100 1890 1200 690
1 2 3 4 5 6 7 8 9 10 11 120
50
100
150
200
250
300
350
-200
0
200
400
600
800
1000
Diminishing Marginal Returns
Marginal Revenue Product (MR x MP)
Profit
No. Of Workers
Mar
gin
al R
even
ue
Pro
du
ct
Diminishing Marginal Returns
0After the employment of the second worker and up to the employment of the ninth worker, each one adds more to revenue than to cost.
0After the employment of the ninth worker the situation is reversed and each additional employee adds more to costs than to revenue.
0Why does it decrease?
0Profit maximised at 9 people.
Diminishing Marginal Returns
Marginal Revenue Product CurveWage Rate/Marginal Revenue Product
Quantity of Labour
Q1Q2
W1
W2
MRP
Wage rate (MC1)
Wage rate (MC2)
Marginal Revenue Product Curve0 Demand curve for labour
0 A firm will demand labour at the point where the MRP = MC (Wage Rate)
0 Wage = W1 firm demands Q1
0 If wage rate rises to W2 demand for labour falls to Q2.
0 MRP rises at first until D.Returns sets in.
0 Firm will not be maximising profit at lower employment level, as if it increases employment it can generate MRP over and above the cost of employing them.
Peer Teaching
0Prepare to teach the rest of the class in pairs the marginal revenue product curve.
0You must define MRP.
0Explain what factors may lead to an increase in wage rates from W1 to W2.
0Draw the diagram.
Shifts in the Demand Curve for Labour
0How would increases or decreases in workers productivity at the Toyota Car Assembly factory in Derbyshire affect Toyota’s demand for labour?
Shifts in Demand Curve for Labour
Wage Rate/Marginal Revenue Product
Quantity of Labour
MRP = D1
MRP = D2
To avoid ambiguity demand curves are now straight.
Shifting the Labour Demand Curve
0Shift to the right if the MRP of labour increases. (i.e. if marginal product of labour/or marginal revenue increases).
0Eg. The demand for car assembly workers will increase if the productivity of car assembly workers rises. (increased training/price of output rises due to increase in car demand).
Critique of MRP Theory0Brainstorm in pairs/groups any criticisms you have of
this theory.
Criticisms
A
B
C
D
Critique of MRP Theory
0Measuring MRP is difficult.
0Work is often carried out in teams which makes it hard to identify to contribution to output of individual workers.
0Difficult to measure MP of workers in the tertiary sector……how do you measure output of accountants?
Plenary
0Define Marginal Product
0Define Marginal Revenue Product
0Draw a marginal revenue product curve.
0Provide a criticism of this theory.
