Labour Market MCQ 1

The Law of Diminishing Marginal Returns

• As units of a variable factor (e.g. labour) increase, combined with a fixed amount of another factor (e.g. capital), the extra output generated eventually diminishes.
• This concept explains why the Marginal Revenue Product (MRP) curve eventually slopes downwards.

Factors Affecting Marginal Revenue Product of Labour

• Skills of the worker: higher skills, qualifications, and motivation lead to greater productivity.
• Quality of capital: high-spec machinery increases productivity.
• Ability of the employer/manager: effective motivation by the manager boosts productivity.
• Morale due to working conditions: uncomfortable conditions lead to lower productivity.
• Selling price of the output: affects the MRP of labour.

Limitations of the Theory in Setting Wage Rates

• Difficulty in measuring productivity for service workers (e.g. nurses) who don't produce a physical product.
• Challenge in distinguishing the portion of output attributed to worker productivity when labour is used with capital.

Labour as a Factor of Production

• Labour refers to the human effort involved in the production of goods and services.
• It is a fundamental factor of production, essential for creating goods and services.

Types of Wages

• Nominal Wage: The monetary value of an employee's wage or salary, without considering its purchasing power.
• Real Wage: The actual value of an employee's wage or salary, taking into account its purchasing power, i.e., what it can buy in terms of goods and services.

Learn about the Law of Diminishing Marginal Returns, its relation to Marginal Revenue Product, and the factors affecting it, including skills of workers and quality of capital.