Glossary
Diminishing Marginal Returns
The principle that as more units of a variable input are added to a fixed input, the marginal product of the variable input will eventually decrease.
Example:
A baker adding more and more flour to a fixed amount of yeast will eventually experience diminishing marginal returns, as each additional cup of flour contributes less to the overall rise of the dough.
Identical Workers
A characteristic of a perfectly competitive labor market where all workers are considered to possess the same skills, productivity, and qualifications.
Example:
For a large fast-food chain, all entry-level crew members are considered identical workers as they perform similar tasks and require comparable training.
Least-Cost Rule
A rule stating that a firm minimizes its production costs when the marginal product per dollar spent on each resource is equal.
Example:
A manufacturing plant applies the least-cost rule by ensuring that the productivity gained from spending an extra dollar on new machinery is the same as the productivity gained from spending an extra dollar on hiring more skilled technicians.
Marginal Product (MP)
The additional output produced by adding one more unit of a variable input, such as labor, while holding other inputs constant.
Example:
If adding one more barista to a coffee shop increases the number of lattes made per hour from 30 to 38, the Marginal Product of that barista is 8 lattes.
Marginal Resource Cost (MRC)
The additional cost incurred by a firm when hiring one more unit of a resource, which is equal to the wage rate in a perfectly competitive labor market.
Example:
If a landscaping company pays an additional gardener 20.
Marginal Revenue Product (MRP)
The additional revenue generated by hiring one more unit of a resource, calculated by multiplying the Marginal Product of the resource by the price of the output it produces.
Example:
If an additional factory worker produces 10 more widgets, and each widget sells for 50.
Perfectly Competitive Labor Market
A market structure characterized by many small firms hiring many identical workers, where no single firm or worker can influence the market wage.
Example:
In a large city, numerous small construction companies all hire general laborers with similar skills, creating a perfectly competitive labor market for those jobs.
Profit Maximization (Labor Market)
The objective of a firm to hire the optimal quantity of labor where the additional revenue generated by the last worker equals the additional cost of hiring that worker.
Example:
A software development company aims for profit maximization by hiring programmers until the revenue generated by their coding output no longer exceeds their salary and benefits.
Profit-Maximizing Rule (for resources)
A rule stating that a firm maximizes its profits by hiring each resource up to the point where its marginal revenue product equals its marginal resource cost.
Example:
A restaurant owner follows the profit-maximizing rule by continuing to hire chefs as long as the additional revenue from the dishes they prepare exceeds their wages.
Side-by-Side Graphs (Labor Market)
A graphical representation used to illustrate the relationship between the overall perfectly competitive labor market and an individual firm operating within that market.
Example:
To analyze the impact of a new immigration policy on the agricultural sector, economists often use side-by-side graphs to show how the market wage for farm labor changes and how individual farms adjust their hiring.
Wage Takers
Firms operating in a perfectly competitive labor market that must accept the prevailing market wage rate for labor and cannot set their own wage.
Example:
A small independent bookstore is a wage taker because it must pay its employees the standard hourly rate for retail workers in its area to attract and retain staff.