Monday, April 21, 2014

Chipotle and Marginal Revenue Product of Labor (MRP(L)). My two favorite things in one blog entry. Life is good (with a side of guac)..


Here is a nice real-life example using Chipolte to illustrate the AP Microeconomics concept of "Marginal Revenue Product of Labor (MRP L)".

Calculating MRPL is important in determining how many workers a firm should hire.

MRPL is obtained by multiplying Marginal Product ("MP") times the Price ("P") of the Good or Service.

Marginal Product is the physical amount of production EACH worker adds to the total.

So if a worker produces 10 units of a good (their "Marginal Product (MP)") and the price of the good is $1.00 then the Marginal Revenue Product of that workers Labor (MRPL) is $10.00.

Assuming Labor is the only input, a firm will hire up to the point where "MRP of Labor = Marginal Resource Cost (MRC)".  MRC is a fancy way of saying "Wage".  The MOST I am willing to pay this worker is $10.00 per hour.

Chipotle continues to refine the science of burrito velocity

Over the first three months of 2014, the US Mexican-food chain saw an average increase of seven transactions per hour at both peak lunch and dinner hours—12 to 1pm and 6 to 7pm, respectivelyOn Fridays, one of its busiest days of the week, Chipotle fielded 11 more customers per hour at lunchtime on average across its stores, a roughly 10% increase.
Chipolte has increased productivity on the burrito assembly line. Through efficiencies they have increased the number of transactions per hour.

This suggests that the Marginal Product of Labor for each worker has increased. Using my simple example above, if we increased productivity 10% then my worker now produces 11 units of the good.  If the price stays the same then the MRPL is now $11.00 (11 units of the good times $1.00).

Now, the firm faces a choice.

(1) It could hire an additional worker with the additional revenue and make life easier for the existing workers (this is what it could do if it operated in a "perfectly competitive labor market") .

(2) It could hire additional workers AND give raises to existing workers who increased the productivity by working more efficiently (this is what it would do if it operative in a "Monopsony labor market"".

(3) It could keep current staffing and wage levels and use the additional profit to open new stores. This would require additional workers to be hired, either at the same wages OR could be more (but likely not).

(4)It could keep the profits and stay at the status quo.

Looking at Chipolte's growth, I think they are pursuing #3.  They already pay above minimum wage so any increases in productivity seem to help fuel expansion with perhaps a side of wage growth on the side.

I could be wrong here.  I welcome alternative scenarios I may have missed. Thanks.  :)


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