Differentiation between market and structural tables

Economics

Market equilibrium for a particular good is the point at which the supply of a good exactly matches its demand. There is no surplus or shortage of the good, thus the price stays fixed and the labor market related to the good stays fixed. The labor market for a fixed price good reaches equilibrium as the amount of workers who are willing to work for a set price matches the amount of workers who employers are willing to hire for that wage. On a supply and demand curve the employees represent the supply side while the employers represent the demand side. This paper will assess how the market equilibrium is affected by the marginal revenue product of labor and government regulation.

Marginal Revenue Product

Firms purchase labor until the marginal revenue product of labor equals the market wage. The marginal revenue product (MRP) is the extra revenue a firm generates from hiring new employees. As long as the income generated by extra hours of work is not less than the wages paid for those extra hours of work, firms will be willing to purchase more labor.

When the labor MRP equals the market wage, firms are at their optimal point of labor consumption, since buying more labor would mean that the MRP is less than the wage, and buying less labor would mean that the MRP is greater than the wage. If the marginal revenue product of labor is less than the market wage, then the firms are using too much labor, and those firms will probably cut some employees until the labor MRP equals the wage.

The law of diminishing occurrence explains this phenomenon. A hiring firm, in determining how many hours of labor it requires, operates with the understanding that the that the first hour of work will turn out the most profit

. In the introductory stage, every additional hour of labor purchased by a firm will yield large marginal revenue. However, as the increasing workforce produces a greater quantity of products, there may be a surplus and not enough demand for the goods. Additionally, after a certain point, extra workers and extra hours can be unproductive. Thus, after a point each additional hour of work will yield less revenue, which drags down the labor MPR below the wage and eliminating the market equilibrium of labor.

Firms will logically hire a new worker or pay for extra hours only insofar as it is profitable. As the labor MRP falls, firms will hire less additional labor. When the MRP is high, they will purchase additional labor. Thus a firm's labor demand is directly correlated to the labor MRP.

The Effect of Regulation on the Labor Market

When the government refrains from placing certain restrictions of wage or production, the market equilibrium is directly related to supply and demand. As the demand for a good decreases the price for the good falls. This is often a result of the price being offset by a price increase of a complementary good.