On page 257 of CFAI Text (Economics), it states that “If the price of the firm’s output increases, the demand for labor increases and the demand for labor curve shifts rightward.” I don’t understand why a firm would higher more labor if their output prices increases. Someone provide some guidance? Thanks
when the output products’ price higher in market, products’ cost no change, it brings bigger margin profit rate to firm. If I were owner, I will hire more labor to produce more product for more profits; meanwhile others will enter the industry and hire more labor;i.e. total demand in market increases. look at figure3 (b) of P255, Y axis is wage rate, X axis is Q’ty of Labor, in above situation, wage rate doesn’t change, it is the price of output increase caused demand increases, so the demand for labor curve shifts rightward.
Without further information, we can say that the price of the product rises for one of two reasons: (1) Demand for the product is increasing, or (2) supply of the product is decreasing. In the first case, clearly more labor is needed to meet the new demand. In the second case (price rising due to shortage in supply), the company still has to hire more people to increase the declining supply.
Here is my take on it: There are 2 conditions for profit maximization: 1.Marginal Revenue = Marginal Cost, MR=MC 2.Marginal Revenue Product = Wage, MRP (obtained as Marginal Cost x Marginal Product)=W These 2 conditions are equivalent: the quantity of labor that maximizes profit produces the output that maximizes profits. The higher the output’s prices increase, the greater would be the incentive for the company to produce more (the output’s price increase not because of increasing fix or variable costs, but because of the demand-supply market equilibrium). To increase output and satisfy market’s demand, the company would employ greater inputs, among which labor. So the demand for labor increases, but since this is not an increase generated by changes in the resource’s price (which would be a shift along the curve), the entire labor curve shifts – a rightward shift.