Why is the marginal revenue product schedule a demand schedule for the individual firm in a purely competitive resource market and selling output in a purely competitive product market?

Question

What will be an ideal response?

Answer 1

Underlying the demand for a resource is the marginal productivity of the resource and the price of the product the resource produces. The marginal product of an additional unit of a resource will decrease because of the law of diminishing returns. In competitive resource markets, the price of the product for the firm will remain constant. Thus, the marginal revenue product (MRP) will fall as more units of resource are hired because of diminishing marginal productivity, giving a demand schedule that shows the inverse relationship between the price of the resource and the quantity of the resource employed.
The number of resources hired depends on where the marginal resource cost (MRC) equals the marginal revenue product (MRP) along the down sloping MRP curve. As MRC falls, the firm can afford to hire more workers, so long as MRP equals MRC. The MRP schedule is the firm’s demand curve for labor because, by applying the MRP = MRC rule, it shows the amount of resources that the firm will hire at each specified resource price.