The Demand for Labor

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The Demand For Labor

The demand for labor and other productive inputs is different from the demand for consumer products such as iPods, books, haircuts, and pizza. Firms use workers to produce the products demanded by consumers, and so economists say that labor demand is a derived demand. That is, it is determined by, or derived from, the demand for the products that workers produce.

Labor Demand by an Individual Firm in the Short Run. Consider a perfectly competitive firm that produces rubber balls. Because this firm is perfectly competitive, it takes the price of its output and the prices of its inputs as given. Because it hires a tiny fraction of the workers in the labor market, it takes the market wage as given and can hire as many workers as it wants at that wage. In addition, the firm produces a tiny fraction of the rubber balls sold in the market, so it takes the price of its output as given. Let’s say the price of rubber balls is $0.50. Consider the firms hiring decision in the short run, defined as the period during which at least one input for example, its factory cannot be changed. The firm will pick the quantity of labor at which the marginal benefit of labor equals the marginal cost of labor. It can hire as many workers as it wants at the market wage, so the marginal cost of labor equals the hourly wage. If the wage is $8 per hour, the extra cost associated with one more hour of labor the marginal cost is $8, regardless of how many workers the firm hires.

Labor Demand in the Long Run. The long-run demand curve for labor shows the relationship between the wage and the quantity of labor demanded over the long run, when the number of firms in the market can change and firms in the market can modify their production facilities. Although there are no diminishing returns in the long run, the market demand curve is still negatively sloped. As the wage increases, the quantity of labor demanded decreases for two reasons: •The output effect....
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