Describes the technology the firm uses to produce its output q.
Consider only 2 factor inputs:
capital K; and
labour (number of employee hours hired) E
E=Number of workers (L)  number of hours (h)
This assumes that the firm gets the same output from hiring: 10L for 8h as 20L for 4h.
 Wages are exogenously determined
The marginal product of labour is the change in output resulting from hiring an additional worker, holding constant the quantities of other inputs
MPE= Δq/ΔE =δq/ δE
MP is the slope of the total product curve
Law of diminishing returns: eventually, the marginal product of labour declines
Average product of labour: the amount of output produced by the typical worker
APE = q/E
Short-run period in which it is not possible to change physical equipment i.e. capital is fixed.
Value of Marginal Product (VMP) is the marginal product of labour times the pound value of the output
This indicates the benefit derived from hiring an additional worker, holding capital constant
VMPE = p x MPE
Value of Average Product is the pound value of output per worker
VAPE = p x APE
How many workers should the firm hire?
If the wage rate w=£22 then the firm will hire 8 workers i.e.
VMPE = w
i.e. the marginal gain from hiring an additional worker is equal to the cost of the hire
Does not pay to expand further. VMP of 9th worker only £18<£22.
If only 6 workers, the additional revenue gained from hiring a 7th worker is £26 > w (£22).
Note that VMP=w if firm hired just a single worker. However, because at this point VMP is upward sloping 1 worker does not maximise profits.
If w was high at say £38 then the firm should hire 4 workers, but VAP is £32 here so VAP<w : hence the firm would be losing money because the per worker contribution to revenue is less than the wage rate so the firm would exit the market.
Only relevant points on VMP function are those below the point where the VAPE curve intersects the VMPE.
The employment decision in the short-run
deadline: 1st May MAX