Value of the Marginal Product

The demand for inputs is considered to be, and referred to as, a "derived demand" since the amount of inputs hired actually comes from demand for the product that the inputs produce. Labor (and, of course, all other inputs) has demand ONLY because of the demand that exists for the end result --- the product (or service) that labor & the other inputs produce. Obviously.

However, the essential point to understand in the input (or resource) market is a concept called the "value of the marginal product". While the idea of the VMP isn't too complicated, it requires a few new graphs, and an understanding of some earlier concepts such as Diminishing Marginal Returns, Marginal Physical Product, and how the price of the output produced is determined. To make the analysis easier, we'll assume some characteristics talked about in perfect competition too.

And, as expected, the concept of elasticity applies to the VMP as well, and its elasticity is affected by factors such as: time, how easily other inputs can be substituted, the price elasticity of the output* produced, and the share of total cost that the input represents.

(*and where the price elasticity of the output also depends on time, the number of substitutes available, the cost of the output relative to other things that could be purchased instead, whether the output is a necessity or a luxury, etc.)


Keep this in mind ---
VMP = MP times the price of the output = MRP

Much more to follow, including a discussion of MRP.