Labor Demand and Supply in a Perfectly Competitive Market. The perfectly competitive firm's profit‐maximizing labor‐demand decision is to hire workers up to the point where the marginal revenue product of the last worker hired is just equal to the market wage rate, which is the marginal cost of this last worker.
In a perfectly competitive market, the firm's marginal revenue product of labor is the value of the marginal product of labor. For example, consider a perfectly competitive firm that uses labor as an input. The firm faces a market price of $10 for each unit of its output.
In a perfectly competitive labor market, the individual firm is a wage‐taker; it takes the market wage rate as given, just as the firm in a perfectly competitive product market takes the price for its output as given.
For example, if the market wage rate is $50 per worker per day, the firm—whose marginal revenue product of labor is given in Table —would choose to hire 3 workers each day. The firm's labor demand curve. The firm's profit‐maximizing labor‐demand decision is depicted graphically in Figure .
When the demand for the good produced (output) increases, both the output price and profitability increase. As a result, producers demand more labor to ramp up production. Education and Training. A well-trained and educated workforce causes an increase in the demand for that labor by employers.
If the terminal or the telephones malfunction, then the demand for that labor force will decrease. As the quantity of other inputs decreases, the demand for labor will decrease. Similarly, if prices of other inputs fall, production will become more profitable and suppliers will demand more labor to increase production.
If the wage rate increases, employers will want to hire fewer employees. The quantity of labor demanded will decrease, and there will be a movement upward along the demand curve. If the wages and salaries decrease, employers are more likely to hire a greater number of workers.
The demand curve for labor shows the quantity of labor employers wish to hire at any given salary or wage rate, under the ceteris paribus assumption. A change in the wage or salary will result in a change in the quantity demanded of labor. If the wage rate increases, employers will want to hire fewer employees. The quantity of labor demanded will decrease, and there will be a movement upward along the demand curve. If the wages and salaries decrease, employers are more likely to hire a greater number of workers. The quantity of labor demanded will increase, resulting in a downward movement along the demand curve.
The law of demand applies in labor markets this way: A higher salary or wage —that is, a higher price in the labor market—leads to a decrease in the quantity of labor demanded by employers, while a lower salary or wage leads to an increase in the quantity of labor demanded.
One key reason is that the demand for labor is based on the demand for the good or service that is being produced. For example, the more new automobiles consumers demand, the greater the number of workers automakers will need to hire.
The horizontal axis shows the quantity of nurses hired. In this example, labor is measured by number of workers, but another common way to measure the quantity of labor is by the number of hours worked. The vertical axis shows the price for nurses’ labor—that is, how much they are paid.