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W0
MVPL
Under perfect
competition, with
diminishing marginal
productivity:
the firm maximises profit
when the marginal cost
of employing an extra
worker equals the MVPL.
Employment
3
E
W0
MVPL
this occurs at E
where wage = MVPL.
Employment is L*.
Below L*, extra employment
adds more to revenue than
to labour costs.
Above L*, the reverse is so.
This decision is consistent
with the MR = SMC rule for
maximising profit under
perfect competition.
L* Employment
4
MRPL
L3
MVPL
L1 Employment
6
MCL
A monopsonist recognises
that additional employment
bids up wages for existing
workers, so MCL shows the
marginal cost of an extra
worker.
W0
MRPL
L3 L2
MVPL
L1 Employment
MCL
W0
MRPL
L4 L 3 L 2
MVPL
L1 Employment
8
Labour supply
for an individual, the decision on how many hours
to offer to work depends on the real wage
an individuals attitude towards leisure and income
determines if more or less hours of work are
supplied at a higher real wage rate.
9
SS1
11
SL
DL
W0
DL
SL
L0
Quantity
of labour
12
DL
D'L
Beginning in equilibrium,
W0
W1
DL
SL
D'L
L1 L 0
Quantity
of labour
13
DL
W2
W0
S'L
DL
SL
L 2 L0
Quantity
of labour
14
Economic rent
the extra payment a factor receives over and
above the transfer earnings needed to induce the
factor to supply its services in that use.
15
Wage
W0
SS
D
A
0 A
L0
Quantity