We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Explain and show what determines the demand for labour by a perfectly competitive firm - Essay Example

Comments (0)
In a perfectly competitive market, firms have zero market power, and thus are unable to influence price on their own. This is because there are a large number of firms, which…
Download full paper
Explain and show what determines the demand for labour by a perfectly competitive firm
Read TextPreview

Extract of sample
Explain and show what determines the demand for labour by a perfectly competitive firm

Download file to see previous pages... Labour, is one of the main inputs, along with land, capital and entrepreneurship. The demand for all inputs such as labour is a derived demand. Derived from the output the given factors are used to produce (Begg D., Fischer S. and Dornbusch R., 2000:176). Firms will use labour and capital and focus on either labour intensive method or capital-intensive methods for production.
In the short run, it is assumed that capital is fixed and labour is variable. Accordingly, the demand for labour is based on the profit maximising condition, which can be stated in two ways (Begg D., Fischer S. and Dornbusch R., 2000:178).
It can be seen that the MPP (which refers to the output of every extra unit of labour) increases from 0.8 to 1 when labour is increased from 1 worker to 2 workers. However, from the 3rd worker onwards MPP begins to decrease. This is explained by the law of diminishing returns, which states that if increasing quantities of variable input are applied to a given quantity of a fixed input, the marginal product, and the average product of the variable input will eventually decrease (Lipsey and Chrystal, 2004:135).
However, the firm can continue to add up to 7 workers and still maintain a profit. Thus satisfying the profit maximising requirements since the MRP (obtained by multiplying the MPP by the unit price of the good, which is assumed as € 500) is higher than Average Variable Cost, which is the wage rate. However, if an 8th worker were to be hired, the AVC will be higher than the MRP, thus the profit maximising condition would be violated. The firm will therefore not expand its labour force to 8 workers (7.5 units of MPP) since the cost of this expansion will be greater than the revenue.
At point B, the MRP is at W1 and employment is at L1. The revenue generated by the extra employment is higher than the labour cost since it above the wage ...Download file to see next pagesRead More
Comments (0)
Click to create a comment or rate a document
The nature of perfectly competitive markets
This paper deals with understanding the nature of perfectly competitive markets. Perfect competition means pure competition in a perfect market. A full market competition is an idealized form. In perfectly competitive markets, short-run profits are possible. However after the entry and exit of firms, a situation of long-run equilibrium results in zero profits.
8 Pages(2000 words)Essay
Perfectly Competitive Firms Versus Monopolies: Inability to Make Enormous Profits
It takes a number to years for a company to create a name in the industry and a specific brand that would catch a particular following in the market. However, despite the quality products and services, these companies may not be able to make enormous profits in the long run.
5 Pages(1250 words)Essay
Explain why Perfectly Competitive Industries are Considered to be Efficient in the Short and Long-Run
However, there are opposing opinions to create unrest. According to George Watson, “Monopoly favors the rich (on the whole) just as competition (on the whole) favors the poor.” (Fitzgerald, 1988) On the one hand, the economist voice about perfect competition and on the other, monopoly is talked upon.
6 Pages(1500 words)Essay
Perfectly competitive markets
Other factors that differentiate perfectly competitive markets from other market structures are easy entry and exit into and out of the industry (Welch & Welch, 2009). Both consumers and producers have perfect information availability regarding quality and prices of the products and there are no transaction costs involved in buying and selling of products.
6 Pages(1500 words)Essay
Explain why perfectly competitive firms cannot make supernormal profits in the long run but monopolies can
It makes truly perfect when the size of the firm is relatively small to the capturing market and all suppliers and buyers have good communication about the cost and
5 Pages(1250 words)Essay
International accounting
The company operates in both the local and the international market. Revenues received in the international markets are mainly in dollars whilst the local market uses the local
3 Pages(750 words)Essay
MACROECONOMICS 1.Explain what determines equilibrium in the labour market, and show how this in turn determines the aggregate supply of output in the classical model. 2.Compare and contrast the effects of a monetary contraction in a model with rationa
The supply of work is an increasing function of the real wage because as more labor is available, the cost of effort becomes cheap and more people are hired while as work supply decreases, the demand for the same goes high and the real wage goes
1 Pages(250 words)Coursework
With reference to new theories of trade, account for the increased importance in the last fifty years of intra-industry trade as a component of world trade
This does not necessarily mean that countries import only what they cannot produce; import and export of goods in the same industry occur. Increasing use of containers to transport the goods has seen intra-industry trade intensifies to satisfy the growing consumer preference
8 Pages(2000 words)Essay
How can understaning elasticity of demand help a firm in its planningExplain how the different levels of elasticity influence behaviour within different market structures
This decision requires knowledge of price elasticity of demand among other factors. Notably, price elasticity of demand refers to the responsiveness of quantity demanded to price changes in
4 Pages(1000 words)Essay
Ompare the supply and pricing decisions of firms in both a perfectly competitiive and monomply market .explain clearly the assumptions made in each case. to what extent would you regard a local taxi firm as operating in a perfectly competitive market
et structure of a firm in a given industry influences the way the company conducts business and how pricing strategies and how to obtain the quantity supplied. However, pricing strategy and quantity supplied all affects profit maximization for the firm (Besanko, et al. 2011 p.,
2 Pages(500 words)Essay
Let us find you another Essay on topic Explain and show what determines the demand for labour by a perfectly competitive firm for FREE!
Contact us:
Contact Us Now
FREE Mobile Apps:
  • About StudentShare
  • Testimonials
  • FAQ
  • Blog
  • Free Essays
  • New Essays
  • Essays
  • The Newest Essay Topics
  • Index samples by all dates
Join us:
Contact Us