After you have worked through this section of the learning unit, you should be able to:
- explain why the demand for labour is a derived demand
- explain the concept marginal revenue product of labour
Firms are responsible for the production of goods and services. The challenge that an economic system faces is how to ensure that firms not only produce goods and services with technical efficiency, but also produce the right combination of goods and services to ensure allocative efficiency. Behind the supply is firms' willingness and ability to supply goods and services and the cost of production is a major determinant of the supply of a good or service. An important cost item for a firm is the cost of labour, and an important decision for every firm is how much labour should be employed in order to supply the market with a good or service.