The demand for factors of production is derived from the demand for the products these factors make. For example, if mobile phones are in greater demand, then the demand for workers in the mobile phone industry will increase, ceteris paribus.The demand for labour will vary inversely with the wage rate. To understand this we need to consider the law of diminishing returns. This states that if a firm employs more of a variable factor, such as labour, assuming one factor remains fixed, the additional return to extra workers will begin to diminish. To explore this process, we need to consider the total physical product (output) produced by a series of workers, which will enable us to measure the individual output from each additional worker-the marginal physical product (MPP).
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