The Demand for a Factor of Production VMP equals marginal product of labor multiplied by the market price of the good produced. -TABLE 18.1 Value of Marginal Product at Angelo's Bakery Value of Quantity Total Marginal marginal of labor product product product ) (TP) (MP=△TP/L) (workers) (loaves per hour) (loaves per worker) A 0 0 …7 14 1 12 2 13 5 10 0 18 4 8 22 3 5 25 2012 Pearson Education
© 2012 Pearson Education VMP equals marginal product of labor multiplied by the market price of the good produced. The Demand for a Factor of Production
The Demand for a Factor of Production The Firm's Demand for Labor The value of the marginal product of labor(VMP)tells us what an additional worker is worth to a firm. VMP tells us the revenue that the firm earns by hiring one more worker. The wage rate tells us what an additional worker costs a firm. VMP and the wage rate together determine the quantity of labor demanded by a firm. 2012 Pearson Education
© 2012 Pearson Education The Firm’s Demand for Labor The value of the marginal product of labor (VMP) tells us what an additional worker is worth to a firm. VMP tells us the revenue that the firm earns by hiring one more worker. The wage rate tells us what an additional worker costs a firm. VMP and the wage rate together determine the quantity of labor demanded by a firm. The Demand for a Factor of Production
The Demand for a Factor of Production The firm maximizes its profit by hiring the quantity of labor at which VMP=the wage rate. If VMP exceeds the wage rate,the firm can increase profit by employing one more worker. If VMP is less than the wage rate,the firm can increase profit by firing one worker. Only if VMP equals the wage rate is the firm maximizing profit. 2012 Pearson Education
© 2012 Pearson Education The firm maximizes its profit by hiring the quantity of labor at which VMP = the wage rate. If VMP exceeds the wage rate, the firm can increase profit by employing one more worker. If VMP is less than the wage rate, the firm can increase profit by firing one worker. Only if VMP equals the wage rate is the firm maximizing profit. The Demand for a Factor of Production
The Demand for a Factor of Production Figure 18.1 shows the relationship between a 16 14 firm's value of marginal 12 product and its demand for 10 labor. 6 The bars show the value of marginal product,which diminishes as the quantity of labor employed increases. 3 Quantity of labor (number of workers) (a)Value of marginal product 2012 Pearson Education
© 2012 Pearson Education Figure 18.1 shows the relationship between a firm’s value of marginal product and its demand for labor. The bars show the value of marginal product, which diminishes as the quantity of labor employed increases. The Demand for a Factor of Production
15 0 5 0 2 3 4 5 Quantity of labor (number of workers) (b)Demand for labor 2012 Pearson Education
© 2012 Pearson Education