Explain and show what determines the demand for labour by a perfectly Essay

relieve and show what determines the demand for elbow grease by a perfectly competitive firm - Essay prototypeLabour, is one of the main inputs, along with land, neat 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., 2000176). Firms will use labour and capital and center 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., 2000178).It can be seen that the MPP (which refers to the output of every extra unit of measurement 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 accrue. This is explained by the law o f diminishing returns, which states that if increasing quantities of variable input are applied to a given sum of a fixed input, the marginal product, and the average product of the variable input will eventually decrease (Lipsey and Chrystal, 2004135).However, the firm can continue to add up to 7 workers and still maintain a profit. and then 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(prenominal) 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 i t supra the wage