Demand, Utility and Marginality

Topics: Supply and demand, Employment, Economics Pages: 5 (1622 words) Published: June 29, 2013
Trident University

Alexander M Wayt

Demand: Utility and marginality

ECO201 - Microeconomics

Dr. Radu Munteanu

15 June 13

When running a business, calculating margins is an essential component. Margins not only can help us figure out what our total revenue will be, they also help us decide if we need to expand as a business, stay where we are, or try to downsize. Of course other factors can be put into this as well; did prices of the goods and services we provide go up? Does this mean we should hire more people? When is a good time to hire more people? These are all things I’ve learned from this module’s reading material. Demand for Labor Increased

From a company’s perspective, there are factors that indicate we should hire more people. There are plenty of reasons why this may occurs. There are also plenty of possible benefits from increasing the amount of employees. More employees can lead to increased revenue, as long as we haven’t hit the point of diminishing the firm’s output. The point at which the firm’s output begins to diminish occurs because of the law of diminishing returns. Let’s look at a few different examples of applicable factors that can change our demand for labor.

To start, let’s suggest that a company has extra reference manuals. Since they have extra reference manuals, each unit of labor (employee) should be able to get more work done (Rittenberg and Tregarthen.) Since there are extra reference manuals, the company can continue to hire more people. Hiring more people has a good chance of increase the company’s marginal product since there are enough capital goods to go around. This is assuming that they don’t hit the point where output starts to diminish per unit of labor. Even if the marginal production is starting to go down, it is still possible for total production increase enough to make it worth hiring a few more people.

A second factor that could increase demand for labor is an increase in land. If a company opens another firm, then it would need more employees in order to accomplish what the mission at hand. Seeing as it’s a new firm, at first the marginal production will increase because it would begin at zero. Total production will initially increase also because again, it is a new firm. The firm should continue to hire people until the marginal product is close to the cost of hiring a new employee. By stopping at that point, they can maximize their total production while still maintaining a positive marginal revenue product.

To further explain why we should stop, let’s take a look at some numbers. Perhaps the cost per worker is only fifty dollars and each product sells for twenty dollars. At first, let’s say that the employee is able to produce eight of the given product. At first, the marginal product would be one hundred and sixty dollars. After we add a second person, let’s say that this employee can make six products. The marginal product would be one hundred and twenty dollars. Now let’s take a look at the third person. Let’s say this person only adds two products because there aren’t enough resources for the three to use. This person would have a marginal product of forty dollars, which would be less than what it costs to pay for that worker. Because of that, it would be in the firm’s best interest to stop hiring at two employees. Market Price VS Demand for Labor

For our second question, let’s take a deeper look at what happens to the demand of labor when the market price of a good or service that a firm produces increases. For this, we’ll be taking a look at the marginal product; the total product, how wages will be affected, and also we’ll take the time to decide how many workers should be hired. Let’s begin with the demand for labor.

If the demand for a particular good or service increases, the price of that good or service will also increase. Although this price change may only be for the short run, an increased demand for a good or service...

References: Bouman, J. Principles of microeconomics. Retrieved from
Rittenberg Libby and T. Tregarthen. (2009). Chapter 12: Wages and Employment in Perfect Competition. Sections 1-4.  Retrieved from
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