Answer to Question #167696 in Microeconomics for Chhavi Nagar

Question

increase in the price of a commodity 'x' has no relationship with the level of employment in perfectly competetive product and factor markets".is this statement true or false?justify and logically analyze your argument.draw graphs if necessary.

Answer 1

The statement is false.

A firm should consider the demand for it's product in order to determine the number of labour units to employ.

A firm's demand for labour is a derived demand. It is derived from the demand for the firm's output. If demand for the firm's output increases, the firm will demand more labour and will employ more workers. If demand for the firm's output reduces, the firm will demand less labour and will reduce its work force.

Marginal revenue product of labour. 

When the firm knows the level of demand for its output, it determines how much labour to demand by looking at the marginal revenue product of labour. The marginal revenue product of labour is the additional revenue the firm gets by employing one more unit of labour. The marginal revenue product of labour is related to the marginal product of labour. In a perfectly competitive market, the firm's marginal revenue product of labour is the value of the marginal product of labour.

For example, Coca Cola Company has a high demand for it's soft drinks that translates to a huge demand for labour. The firm therefore has to employ more units of labour to match the market demand for it's product.

Plotted on a graph, the curve will slope downwards from left to right obeying the law of diminishing marginal returns. This will now mean that as more labour units are employed, the marginal product of labour starts declining dragging down the marginal revenue product of labour.

Graphical representation of relationship between Marginal revenue product of labour and labour.