Marginal

Productivity
Theory

Marginal Physical
Product
Extra Output from
each additional
unit of resource

Marginal Revenue
Product
Price x Extra Output
Change in Total Revenue
Resulting from the use of
each additional unit of
resource

See Overhead 4.3

Perfect competition
Adding one variable
resource labor
Columns 3 and 6
demonstrate the law of
diminishing returns

Law of Diminishing
Returns
As successive increments of
a variable resource (labor)
are added to a fixed resource,
the marginal product of the
variable resource will
eventually decrease.

Marginal Resource
Cost
Amount which each
additional unit of
resource adds to a
firms total (resource)
cost

MRP=MRC Rule
It is profitable for a firm
to hire additional units
of a resource up to that
point at which that
resources MRP=MRC

MRP=MRC
and
MR=MC
Rationale the same
BUT point of reference
is now inputs of a resource

Purely Competitive Labor

Market

Wage rate established

by market supply and
demand
Firm is a wage taker

Imperfect Labor
Market
Firm is a price maker
Pure monopoly, oligopoly,
monopolistic competition
Downward sloping demand
curve

MRP of competitive
seller falls for one
reason:
Marginal Product
diminishes

MRP of Imperfectly
competitive seller falls for
two reasons:
1- Marginal Product diminishes
2- Product price falls as output
increases

Conclusions
For review check out
chapter 27
pages 564-569
Tables 27-1 and 27-2
same as overheads