Production, Costs, and Profits essay
The main difference between the labor markets and the majority of other markets is in the nature of an existing demand: the demand for labor is the original demand. The major part of labor provided is rather a resource for the production of other goods, rather than a product ready for consumption. We will analyze the demand for labor of an example of a firm hiring workers to use their labor for the production of pasta goods for sale.
The main factor forming the demand for labor is the need of the production for human resources (Coontz, 2010). Thus, the expansion of the company, opening of new branches or subsidiaries, or the decision to maximize profits can raise the demand for labor.
Under favorable conditions, through the engagement of additional manpower companies can increase the production in the short run (i.e. the period during which the types of main capital determining the technology (typically, equipment) cannot be replaced). At the same time, hiring additional workers is economically justified only if the revenue from additionally produced and sold products exceeds the cost of additional manpower (Coontz, 2010).
The possibilities of increasing costs for wage depend on the growth of production output associated with labor input and on the growth of income from the production of an additional unit of a product. In the conditions of a competitive market, marginal revenue is a fixed value, equal to the issue price (Fleetwood, 2006). At the same time, marginal profitability of labor is simultaneously the limiting value of labor (MVPL).
From the above, it follows that the number of employees is optimal when the amount of wages that are paid out is equal to marginal revenue productivity of labor. The latter is defined as the increase in income from the issue of an additional unit of product multiplied by the increase in output when using an additional unit of labor (Coontz, 2010). Indeed, hiring an additional employee, the company increases the expenditures by the amount of employee’s wage, while the net additional income obtained by the enterprise equals to marginal revenue productivity of labor excluding the increase of salary budget.
When the number of employees is increased, the value of marginal returns starts to decline due to the reduction of marginal revenue with the growth of output and the reduction of marginal product due to the law of diminishing returns of production factors. In case when the increase in wages exceeds the marginal rate of return, the interest in hiring additional workers is lost (Fleetwood, 2006).
Thus, while the value of increase in output obtained from each additional worker exceeds the average output per an employee of the enterprise as a whole, labor productivity is increasing. If the increase in production as a result of hiring additional workers is lower than the average output per an employee, the productivity is reduced.
Thus, the demand for labor is a function of the marginal product of labor: LD = LD (MPL). From the condition of profit maximization (P × MPL = W), it follows that MPL = W/P, and since LD = LD (MPL), then this implies that LD = LD (W/P) (Coontz, 2010). This means that the demand for labor is a function of real wages. Moreover, this dependence is negative. The higher real wages are, the lower the demand for labor is. Changes in real wages lead to a movement along the labor demand curve and to the changes in the demand for labor (Fleetwood, 2006).
In this way, marginal revenue productivity of labor (MRPL) is the basis for the labor demand placed by an enterprise. Companies are interested in hiring additional workers until the marginal return on labor is higher than the level of wages, and tend to reduce employment if it is below this level.
