Labour, is one of the main inputs, along with land, capital and entrepreneurship. The demand for all inputs such as labour is a derived demand. Derived from the output the given factors are used to produce (Begg D., Fischer S. and Dornbusch R., 2000:176). Firms will use labour and capital and focus on either labour intensive method or capital-intensive methods for production.
In the short run, it is assumed that capital is fixed and labour is variable. Accordingly, the demand for labour is based on the profit maximising condition, which can be stated in two ways (Begg D., Fischer S. and Dornbusch R., 2000:178).
It can be seen that the MPP (which refers to the output of every extra unit of labour) increases from 0.8 to 1 when labour is increased from 1 worker to 2 workers. However, from the 3rd worker onwards MPP begins to decrease. This is explained by the law of diminishing returns, which states that if increasing quantities of variable input are applied to a given quantity of a fixed input, the marginal product, and the average product of the variable input will eventually decrease (Lipsey and Chrystal, 2004:135).
However, the firm can continue to add up to 7 workers and still maintain a profit. Thus satisfying the profit maximising requirements since the MRP (obtained by multiplying the MPP by the unit price of the good, which is assumed as € 500) is higher than Average Variable Cost, which is the wage rate. However, if an 8th worker were to be hired, the AVC will be higher than the MRP, thus the profit maximising condition would be violated. The firm will therefore not expand its labour force to 8 workers (7.5 units of MPP) since the cost of this expansion will be greater than the revenue.
At point B, the MRP is at W1 and employment is at L1. The revenue generated by the extra employment is higher than the labour cost since it above the wage ...
Cite this document
(“Explain and show what determines the demand for labour by a perfectly Essay”, n.d.)
Retrieved from https://studentshare.net/miscellaneous/385376-explain-and-show-what-determines-the-demand-for-labour-by-a-perfectly-competitive-firm
(Explain and Show What Determines the Demand for Labour by a Perfectly Essay)
“Explain and Show What Determines the Demand for Labour by a Perfectly Essay”, n.d. https://studentshare.net/miscellaneous/385376-explain-and-show-what-determines-the-demand-for-labour-by-a-perfectly-competitive-firm.
This paper deals with understanding the nature of perfectly competitive markets. Perfect competition means pure competition in a perfect market. A full market competition is an idealized form. In perfectly competitive markets, short-run profits are possible. However after the entry and exit of firms, a situation of long-run equilibrium results in zero profits.
It takes a number to years for a company to create a name in the industry and a specific brand that would catch a particular following in the market. However, despite the quality products and services, these companies may not be able to make enormous profits in the long run.
However, there are opposing opinions to create unrest. According to George Watson, “Monopoly favors the rich (on the whole) just as competition (on the whole) favors the poor.” (Fitzgerald, 1988) On the one hand, the economist voice about perfect competition and on the other, monopoly is talked upon.
Other factors that differentiate perfectly competitive markets from other market structures are easy entry and exit into and out of the industry (Welch & Welch, 2009). Both consumers and producers have perfect information availability regarding quality and prices of the products and there are no transaction costs involved in buying and selling of products.
The supply of work is an increasing function of the real wage because as more labor is available, the cost of effort becomes cheap and more people are hired while as work supply decreases, the demand for the same goes high and the real wage goes
This does not necessarily mean that countries import only what they cannot produce; import and export of goods in the same industry occur. Increasing use of containers to transport the goods has seen intra-industry trade intensifies to satisfy the growing consumer preference
et structure of a firm in a given industry influences the way the company conducts business and how pricing strategies and how to obtain the quantity supplied. However, pricing strategy and quantity supplied all affects profit maximization for the firm (Besanko, et al. 2011 p.,
2 Pages(500 words)Essay
GOT A TRICKY QUESTION? RECEIVE AN ANSWER FROM STUDENTS LIKE YOU!
Let us find you another Essay on topic Explain and show what determines the demand for labour by a perfectly competitive firm for FREE!