Wages - Theory Of Distribution

SUBJECT: MICROECONOMICS (ECO 162)

ASSIGNMENT 2

QUESTION 1

ACCORDING TO THEORY OF DISTRIBUTION, EXPLAIN HOW DOES WAGE IS DETERMINED?

Certainly the market demand and supply of these factors. In other words, wages, rent, interest and profit are determined by the supply and demand of the respective factor or resource. This is explained by the concept of marginal product (MP) or marginal physical product (MPP). For example: labor and wages. In this case MP and MPP refer to additional real product the firm gets as a result of employing one more labour. Productivity in monetary terms refers to the additional revenue or marginal revenue a firm obtains from the sale of the marginal physical product of labour.
Since this marginal revenue is obtained from the sale of the marginal physical product, it is called marginal revenue product (MRP).
Usually firms are more concerned with the productivity in the monetary value rather than the physical value because monetary value will ultimately determines the firm’s demand for labour.
Since MRP measures the labour the labour’s contribution to the firm, it will be the maximum price the firm will pay for that additional unit if labour.
Therefore, a firm’s demand curve for labour is nothing more than its MRP than ts MRP curve.
If the forces of the supply and demand determine a certain wage rate, workers would be hired until MRP is equal to the wage rate. Then the firm will stop hiring.
Example: this table shows a batik factory that employs 10 workers and the total output of batik is 100.
Table 8.1
NO OF WORKERS
TOTAL PRODUCT
MARGINAL PRODUCT
PRICE
TOTAL REVENUE
MARGINAL REVENUE PRODUCT (MRP)
1
10
10
100
1000
1000
2
20
10
100
2000
1000
3
28
8
100
2800
800
4
35
7
100
3500
700
5
41
6
100
4100
600
6
46
5
100
4600
500
7
50
4
100
5000
400
8
53
3
100
5300
300
9
55
2
100
5500
200
10
56
1
100
5600
100

Figure 8.1: MRP curve for labour