ECO101H1 Lecture Notes - Lecture 11: Labour Economics, Perfect Competition, Diminishing Returns
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Demand for a factor is a derived demand (from the market for the good it is used to produce) Vmp = price (of good) * marginal product of factor. Firms are perfectly competitive, and the price of widgets is . Labour is the only variable factor of production (so the law of diminishing returns applies) No. of workers (tp) total product (mp) marginal. Observations: mp declines as number of workers increases (and thus, vmp declines as number of workers increases. Firm will not hire a worker unless vmp is at least equal to the wage rate. If wage rate is , firm will not hire the 3rd worker. If wage = 200, firm hires 2 workers. Vmp = demand for labour: assume ssl is upward sloping, shifts in ddl and ssl alter wage (w) and employment (n, equilibrium wage (w) is vmp of last worker hired.
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