A Firm’s Demand Curve

A Firm’s Demand Curve - to 6 4 and then 3...

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A Firm’s Demand Curve: Let us begin with the simple case of a competitive market . There is competition both in the labor market and the product market. Price of the product is assumed to be $5. The firm has to determine its demand under the following productivity conditions: No. of workers Employed Total Physical Product Marginal Physical Product Marginal Revenue Product (MPP $5) 1 5 5 25 2 12 7 35 3 18 6 30 4 22 4 20 5 25 3 15 In the example , the number of workers employed increases progressively from 1 to 5. With more workers employed total output continuously increases from 5 to 12…to 25 units. Marginal product initially rises from 5 to 7 (12-5=7) but subsequently falls from 7
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Unformatted text preview: to 6, 4, and then 3. Under competitive product market MRP or money value of the MPP at a fixed price of $5 will be 25, 35, 30, 20 and 15. The firm will decide how many workers need to be employed depending on the present market rate of wages. If the rate of wages is as high as $35 per worker, the firm can employ only two workers. With the wage rate as low as $15 the firm can employ five workers. If we assume that the actual competitive labor market wage rate is $20 the firm can employ 4 workers and remain in equilibrium. At this wage rate the demand and supply forces have been equated....
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