Question about Labour Markets - Revenue or Profit Maximising Point?

Hey - quick question about the most efficient employment level in labour markets.

Some resources say MRPL = MCL is the profit maximising point while others say it's the revenue maximising point.

I'm inclined to think it's the revenue maximising point as it's do with productivity and doesn't take other AFC / AVC's of a firm into account.

Can anyone clarify?!

Tyia :smile:

Reply 1

Sarah Bo

Hi

Profits are maximised when the MC (the extra costs u incur when producing an extra unit) = MR (the additional revenue u receive from producing an additional unit) Profit is maximised either when the diff between TC and TR is at its highest or when MR = MC. The MR is the gradient of the tangent at the TR so to use TR and TC, u need to have 2 parallel lines with the same gradient (which therefore shows MC = MR when gap between TC and TR is at its highest)

Revenue is maximised when MR is 0, at the midpoint of the Demand (average revenue) curve.

Hope this helps!

Reply 2

beachpanda

Thanks @Sarah Bo but I was wondering specifically to do with labour markets and MRPL = MCL?

Some literature says it's the revenue maximising point whereas some say profit is maximised here.

Original post by Sarah Bo

Reply 3

Sarah Bo

Hi again,

Ok, so, l'll tell you this: The total is maximised when the marginal is 0.

Total Revenue is Maximised when MR is 0
Total Profit is maximised when MR = MC.

Using this info, can u explain to me why profits are maximised when MR = MC?

Reply 4

beachpanda

Hi Sarah,

I understand the concept of MC=MR as the point of profit maximisation but I'm specifically querying why a firm would want to operate where Marginal Revenue Product of Labour is equal to Marginal Cost of Labour?

Is it to maximise profits or revenue? I understand it's a similar principle to MC=MR but MCL doesn't take other fixed / variable costs into account so surely it's revenue maximisation, not profit as the firm's other costs could be so high that they prevent profit from being made overall. Unlike MC which takes all costs into account.

Thanks
Jordan

Original post by Sarah Bo

Reply 5

idk01

I get what you're trying to say and it's confusing me as well. When MRP of labour = MC of labour, profit is definitely being maximised, not revenue. I think the reason for this is because the MC of labour is equivalent to the market equilibrium wage, a.k.a the supply of labour. So if MRP was higher than the MC of labour, they could increase profits by hiring more people (think of MRP as the demand curve and MC as the supply curve). If they then increase their workforce to a point where MRP = MC (the market equilibrium), they are producing at full capacity and therefore maximising profits. Remember that average total costs will go down as profit increases (as average fixed costs will decrease). Hope this isn't too confusing.

Question about Labour Markets - Revenue or Profit Maximising Point?

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