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Course: AP®︎/College Microeconomics>Unit 5

Lesson 1: Introduction to factor markets

A firm's marginal product revenue curve

Every time a firm hires more labor, they get more output which means more revenue. In this video we begin thinking about how much incremental benefit a firm gets from hiring one more person. Created by Sal Khan.

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• Is this also known as the Law of Diminishing Returns, or is that something different?
• Actually, the law of diminishing returns applies to the marginal productivity. So your solution of adding additional workers doesn't work. The law says that with increasing inputs (capital / labor) the returns will keep becoming less and less, and yes eventually even negative.

So your Marginal Return... will diminish...and perhaps even go negative if you add too many inputs.
• I am not sure I get the "halfway" plottting. Why can't we plot the MPR of 1 unit of labour at (1,25)? Why do we have to do it at (0.5, 25)?
• Cause were taking the average marginal productivity and not the MP at a point .
• The beginning step defines the increase in cars washed with added workers without saying that the decline is due to lack of demand for car washes, not declining worker productivity. Is that right? As US employment is a big topic, I would like to see an extension to cover risk and uncertainty. You are certain about needing to pay a new worker, while the demand, marginal revenue in your simple model, is uncertain so fewer people are hired. Another example worth describing is the added value from skilled workers who raise the price per unit. The super wash \$15/car with Hooter Girls washing.
• The diminishing increase in total output is in this case not due to falling demand, but to worker productivity. As the amount of workers increase they will begin to stand in each other's way, need more planning etc etc, so the marginal product will diminish over time.
Just think of it as how many they are ABLE to wash per hour, not how many they are ACTUALLY washing per hour.
• He describes MPL as 'halfway' between each TP point (cars washed). This is misleading as 'marginal' means the incremental value of adding one additional unit. Therefore it is not 'halfway'. It would be more accurate to say the 'difference' between each TP point .
• You mean MPL=5 at L=1, MPL=4 at L=2, and so on..., right? Is it the same with MPR? was he wrong?
• Why people can use marginal product curve to create demand curve? Thx
• Because marginal benefit keep decreasing with the increase in price of a product. And thats what the demand law is.
• Why does MPL=5 at L=0.5?
I think that MPL=delta TP/delta L or MPL=5 at L=1, MPL=4 at L=2, and so on.
• Why would someone not split the employees up, that way they will wash 25 cars.?That way your getting more bang for the buck.
• that would work but its assumed that they are all working as a team for this project
(1 vote)
• I felt strange with the last two graphs, how could the two of them have a linear line? if Sal have 6 people, and wash 16 cars? adding one more person to wash one more cars is easy to do, what will happen? What if Sal have 10 people and wash 16 cars, what will happen to the line? Thank you!
(1 vote)
• For the last two graphs being straight lines, they are the graphs of the derivative of the original function. Check out calculus if you want to know more. Basically, they're graphing the value of the slope (change in rise (y-axis) over change over run (x-axis)) at every point. For the graphs shown, Sal could not wash 16 cars, because the graphs indicate that the 6th person will add 0 cars . Therefore, no matter how many people Sal has washing cars, he can never get to 16 cars washed. In fact, after 6 people, if the trend in the video continues, they will start washing fewer cars with negative cars per person.
• At the end Sal told that we have to add the demand curves for all firms in this market to get the demand curve for the market with quantity being labor. Does he mean that we have to actually step up the demand curve to get the total demand curve ? I feel then we would be saying that for each 1 extra labourer the entire market gains money. But that would be wrong as only one firm would get money. So we should somehow average all the lines by summing their equations all up and then dividing by the # of lines analogous to the number of firms. What do you think ?
(1 vote)
• He does not mean adding them upward. He actually means adding them rightward. And yes, with 1 extra laborer, the entire market gains, as wages will go down for everybody. If wages went down only at one firm, workers would switch from that firm to other firms.
• Just to clarify, is the Marginal Revenue Product (MPR) the same as the demand of the firms for labor? It could not be equal to the consumer demand for the product right?
(1 vote)
• The marginal revenue product is the price multiplied by the marginal product. It is equal to the demand for labour, which is different from the demand for a product.
(1 vote)