Unit 3 --- Third Reading Assignment ---

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Your third reading assignment for Unit Three is short: pp. 814-819. This is Appendix "A" to chapter 35. In many texts, this material would have been incorporated into the main chapter itself. Your author chose to keep his presentation in chapter 35 somewhat general. The technical concepts are presented in this appendix.

Learn the basic definitions:

Total Physical Product (TPP) = total production from a given number of employees.

Marginal Physical Product (MPP) = change in total production divided by the change in the number of employees. If the change in the total number of employees is just one, then the denominator of this fraction is also one and the procedure is simple. The word change means difference. In other words, compare the difference in total production from one level of output to the next higher level with the difference in the number of employees who are employed at the two different levels of output.

Total Revenue Product (TRP) = TPP x product price This is similar to the total revenue concept studied earlier in product markets.

Marginal Revenue Product (MRP) = change in TRP divided by the change in the number of employees. This is analogous to the marginal revenue concept studied earlier in product markets.

To determine the optimal number of employees to hire, the employer uses a version of the MR = MC approach that you studied previously: MRP = MC of labor

Look at the table on the top of p. 815 and find column five. This is the MRP column. In a perfectly competitive labor market, a company can hire all the labor it wants at the established market wage. So if the going wage rate = $12, then this firm would hire 31 employees.

Note that the MRP of the 31^st worker = $12, which is just equal to the MC of labor. If the established wage rate = $8, then the firm would hire 33 employees. The MRP of the 33^rd worker is just equal to the wage rate of $8. Not surprisingly, as the established wage rate drops, firms will hire more employees. At lower wage rates, additional employees do not have to be as productive to make it profitable for a firm to hire them.

Study the mini-table on p. 817. The principles are the same as you studied in the earlier production tables. That is, for perfect competition, P = MR. For any other market structure, P exceeds MR. The same is true for factor markets. That is the reason for the difference between columns six and seven in the table. It is also the reason why a monopolist will hire less labor than a perfectly competitive firm, just as in the earlier product markets we found that a monopolist would produce less output than a purely competitive firm.