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nature and carries out production with the goal of profit maximisation. We also assume that given the technology of the firm, the law of diminishing marginal product holds. The firm being a profit maximiser will always employ labour upto the point where the extra cost she incurs for employing the last unit of labour is equal to the additional benefit she earns from that unit. The extra cost of hiring one more unit of labour is the wage rate (w). The extra output produced by one more unit of labour is its marginal product (MP L and by selling each extra unit of output, the additional earning of the firm is the marginal revenue (MR) she gets from that unit. Therefore, for each extra unit of labour, she gets an additional benefit equal to marginal revenue times marginal product which is called Marginal Revenue Product of Labour (MRP ). ThuL, while hiring labour, the firm employs labour up to the point where w = MRP L and MRP = MR × MP L L Since we are dealing with a perfectly competitive firm, marginal a revenue is equal to the price of the commodity and hence marginal revenue product of labour in this case is equal to the value of marginal product of labour (VMP ). L As long as the VMP iL greater than the wage rate, the firm will earn more profit by hiring one more unit of labour, and if at any level of labour employment VMP is lLss than the wage rate, the firm can increase her profit by reducing a unit of labour employed. Given the assumption of the law of diminishing marginal product, the fact that the firm always produces at w = VMP implies that the demand curve for labour is downward sloping. To explain why it is so, let us assume at some wage rate w ,1demand for labour is l .1Now, suppose the wage rate increases to w 2 To maintain the wage-VMP equaLity, VMP L should also increase. The price of the commodity remaining b 75 constant , this is possible M only if MPLincreases which in Wage r turn implies that less labour t SL E should be employed owing to u the diminishing marginal b productivity of labour. u Hence, at higher wage, less m w* labour is demanded thereby leading to a downward sloping demand, curve. To arrive at the market demand D L curve from individual firms’ demand curve, we simply O l* Labour(in hrs) add up the demand for labour by individual firms at different wages and since each firm demands less Wage is determined at the point where the labour demand and supply curves intersect. labour as wage increases, the market demand curve is also downward sloping. aRecall from Chapter 4 that for a perfectly competitive firm, marginal revenue equals price. bSince the firm under consideration is perfectly competitive, it believes it cannot influence the price of the commodity. Reprint 2026-27