The Value of the Marginal Product of Labor and the Demand for Labor

The marginal product of labor or MP_L shows the additional units of the product manufactured by hiring another unit of labor while keeping other inputs constant. To know whether it is beneficial to hire another worker, the firm, such as the mango orchard, wants to know how much revenue is earned by employing this new hire.

The Value of Marginal Product of Labor, or VMP_L, shows this additional revenue from hiring an extra unit of labor.

To calculate the value of the marginal product of labor, the price of the mangoes is required, which we can assume is 1 dollar per unit. In perfect competition, the firm is a price taker. This means that the price is fixed and does not change with the quantity of mangoes sold.

The value of marginal product of labor is the Marginal product of labor multiplied by the per unit price of the mangoes.

Consider the schedule. The price is fixed, and the marginal product of labor is continuously declining as more labor is hired. This means the value of marginal product of labor declines as more labor is hired, resulting in a downward-sloping VMP_L curve.

This curve is the labor-demand curve for the firm.