[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

A
B
Firm
supply
curve
Production
function
PRICE (p )
QUANTITY (Q )
QUANTITY (Q )
Q 1
L 1
LABOR (L )
p 1
Q 1
FIGURE 8.5
THE DEMAND FOR LABOR
The demand for labor can be calculated from the firm’s supply curve and its production
function. Panel A shows how the firm, given a market price p 1 , chooses a level of output
Q 1 from its supply curve. Panel B shows that to produce the output Q 1 requires L 1 units
of labor. L 1 is the demand for labor.
Demand for labor
(value of marginal
product of labor)
we have examined these decisions, the basic law of supply and demand
can be used to show how the wage is determined in the labor market.
Labor is one of the primary inputs that firms use in producing output.
So our discussion begins by considering what determines a firm’s
demand for inputs.
WAGE (w )
w 2
w 1
L 2 L 1
QUANTITY OF LABOR (L )
FIGURE 8.6
THE DEMAND CURVE FOR LABOR
The value of the marginal product of labor declines with the
level of employment. Since labor is hired up to the point at
which the wage equals the value of the marginal product,
at wage w 1 , employment is L 1 , and at wage w 2 , employment
is L 2 , The demand curve for labor thus traces out the
values of the marginal product of labor at different levels
of employment.
FACTOR DEMAND
In the process of deciding how much of each good to supply and
determining the lowest-cost method of producing those goods,
firms also decide how much of various inputs they will use. This is
called factor demand. In Chapter 6, the analysis of costs was broken
up into two cases, one in which there was a single variable input, or
factor of production, and one in which there were several factors.
We proceed along similar lines here. Labor is used as our main
example of an input, but the same principles apply to any factor of
production.
When there is only a single factor of production—here labor—then
the decision about how much to produce is the same as the decision
about how much labor to hire. As soon as we know the price of the
good, we can calculate the supply (output) from the marginal cost
curve. As soon as we know the output the firm plans to produce, we
know the labor required simply by looking at the production function,
which gives the labor input required to produce any level of output.
182 ∂ CHAPTER 8 LABOR MARKETS