THe firm’s demand curve for labour is: identical to the supply curve of the output product mirror image of the suplly curve of the output product the mirror image of the marginal cost of labour curve, assuming all other resource imputs are constant the downsloping portion of the marginal revenue product of labour curve. My understnading of these are one by one: A: it is saying that when the supply of output product is high so is demand for labour. Not true. B: When the supply of output is high the demand for labour is low. Also not true. C: As the cost of one additional unit of labour rises the demand for labour decreases. WHY is this not correct? D: As the addition to revenue from an addiiotnal output using one more input of labour is decreasing the demand for labour increasing. Don’t quite understand this one and am not sure I have even got it right. Any explanation would be much appreciated.
I really need to understand… it’s been a sore topic with me for a while. Can anyone help?
D was correct! Firms will employ additional labor until the marginal revenue product of labor equals the wage rate. The marginal revenue product falls as the firm increases the use of the resource. The relationship between quantity of labor demanded and wage rate is identical to this negative relationship between quantity employed and marginal revenue product.
As HPlee said, firms demand additional labor until the incremental worker earns less than his or her wage. The first worker may add incremental revenue of $1000, the second incremental revenue of $500, and the third just gets in the way and adds only $100 of incremental revenue. Plotting those three data points would give you the demand curve. The amount of labor that would actually be demanded would depend on the price of a unit of labor. If it’s $1200, no labor is demanded, if it’s $700, one unit is demanded, if it’s $400, two units are demanded, and if it’s $50, three units are demanded.
Thanks a lot chebychev, makes a bit more sense I understand D now but what about C. Is my understanding (in the the first post) wrong or what?
Marginal cost of labor is the supply curve of labor. marginal cost of labor is the wage at which labor is willing to sell. higher MC, more labor is supplied.
In your explanation of C, you say that demand for labor falls as marginal cost of labor rises. This may be true, but not necessarily. What if the cost of hiring an additional worker is more than the cost of hiring the last worker, but the additional worker also creates more incremental value because of the benefits of teamwork, etc.? Then the firm would want to hire that worker, in spite of the higher marginal cost. The firm focuses on marginal revenue in comparison to marginal cost (i.e., incremental profit from the additional worker), not marginal cost alone.