Thus, any event that changes the supply or demand for labor must change the equilibrium wage and the value of the marginal product by the same amount, because these must always be equal. The value of the marginal product curve will slope downward because of the diminishing marginal product of labor. When the production function is linear, the marginal product of labor is constant. It is equal to the number we labeled productivity in our original production function. We represent the production process of a firm schematically in Figure 8.5 “The Technology of a Firm”. Our description is quite general and can apply to nearly any kind of firm—for example, a lawyer’s office, Walmart, a university, and a child’s lemonade stand.

By definition, gross substitutes are inputs for which when the price of one changes, the demand for the other changes in the same direction. This implies that the substitution effect outweighs the output effect. The decline in the price of security equipment used by businesses to protect against illegal entry has reduced the demand for night guards. Several other factors how many valence electrons does barium have tend to make a firm’s long-run demand curve more elastic than its short-run curve. To see how the MP curve in stage II relates to labor demand, we need to transform the TP and MP information to hypothetical numbers via a table (Table 5-2) and convert the analysis from output to monetary terms. Stage II of the production function is called the zone of production.

By dividing the MRP by MRC, we can compare the additional revenue generated per dollar cost of the resource. For example, if the MRP/MRC is $2, then the firm is generating two dollars of revenue for every dollar of cost of the resource. A reduction in market price would decrease the marginal revenue product of labor.

The idea that each additional hour of labor input contributes a smaller and smaller amount to output. A description of how much output a firm can produce as it varies its inputs. Labor market flexibility allows companies to make decisions about their labor force in response to market changes and to help boost production. The individual workers may disagree with how their union dues are being spent or the activities that are supported.

The production function combines a firm’s physical capital stock, labor, raw materials, and technology to produce output. Technology is the knowledge that a firm possesses, together with managerial skills. How unions have increased wages but reduced job opportunities by shifting the supply-of-labor curve to the left. Amount by which the extra production of one more worker increases a firm’s total revenue. A marginal revenue product is the market value of one additional unit of input.