Marginal revenue product is the demand for labour

After you have worked through this section of the learning unit, you should be able to:

  • graphically illustrate and explain the demand for labour
  • explain why the demand for labour curve is downward sloping
  • explain why a negative relationship exists between the wage rate and the quantity of labour demanded
  • explain how the marginal revenue product and the wage rate influence the employment decisions by firms

The marginal revenue product represents the demand for labour. In the following diagram, the marginal revenue product of labour curve for Blaker Maker is drawn using the data in the above table. On the horizontal axis, the quantity of labour is plotted and on the vertical axis, the marginal revenue product (MRP) of labour.

Marginal revenue product of labour

Note that we are only interested in the downward-sloping part of the marginal revenue product of labour curve. As you will shortly see, this represents the demand for labour curve.