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SummaryCh05 - S u m m ar y Labour demand is derived demand...

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Summary Labour demand is “derived demand,” that is, labour is hired in order to produce goods that are sold in the product market.For this reason,labour demand is always connected to the product market, espe- cially in terms of the degree of competition, whether from foreign or domestic producers. Labour is only one of several factors of production. In the short run, we imagine that all of these other factors are fixed, and labour is the only variable input. The profit-maximizing level of labour demand will be chosen so that the marginal bene- fit equals the marginal cost of hiring an additional unit of labour.The marginal cost is the wage rate, while the marginal benefit is the revenue associat- ed with the extra production by that worker, its marginal revenue product (MRP N ). Therefore, the short-run labour demand function is given by the MRP N schedule,where employment is determined by W = MRP N .
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