Demand for Labor in Perfect Competition - Video Tutorials & Practice Problems
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Demand for Labor in Perfect Competition
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Alright, So now let's discuss the firm's demand curve for labor in a little more detail. So remember we're talking about the demand for labor. So in this case it's the firm that is demanding the labor and it's the individuals who supply the labor, right? So when we see a firm's demand for labor, well it's gonna depend, it depends on the demand for the good being produced. Okay, so the good being produced, you can imagine if it's some good that no one wants to buy, like, I don't know, like a booger flavored pizza or something like that. Uh no one's gonna want to buy it. So you're not gonna demand laborers to produce these booger flavored pizzas that no one wants to buy. Right? So it's gonna depend on the demand for the good. So you can imagine as there's more and more demand for a good, there's gonna be more and more demand for the labor to produce the good. Okay. So what this means is that the demand for labor as well as other factors of production? Well, it's a derived demand. Okay. We use this term derived demand because it depends on the other on the other demand of the good being produced, right? So if there was no demand for the good being produced, there would be no demand for this labor. So the demand for the labor is derived from the demand for the actual good being produced itself. Cool. So let's go ahead and look here on the left graph, we've got a market for corn pickers and this looks like very similar to what we've seen in product markets, right? We've got a downward sloping demand, upward sloping supply, So nothing really too different here. But let's notice what the differences are. First notice, like I said, the supply of corn pickers, right? These are individuals. These are people that are supplying their labor to the firms to pick the corn, right? So you gotta keep that in mind that it's almost like the rules have swapped here. Now, the individuals are the suppliers, and the demand ear's are the firms, right? They demand the corn pickers to pick the corn for them. All right, So another little difference that we're gonna see here is that instead of having price on the on the y axis we're gonna have wage. So this is gonna be the wage. So, remember, in the product market, what's the price gonna be? Well, this is gonna be the price of the labor, what is the wage? It's gonna be the price of the labor. And down here we still have quantity, right? But this is the quantity of workers, right? How many workers are gonna be hired? So we've got to supply a demand they cross, just like we're used to we've got an equilibrium right, right here in the middle, that's our equilibrium wage, that's gonna be here at W Star, right? And down here we'll have our equilibrium quantity of workers, right? So that will be a number of workers right there. So now let's take this information and take it over to the individual firm. So now the individual firms demand for labor? We talked about the production function in the previous videos, right? And we saw that marginal revenue product and that was gonna represent the firm demand for labor. So the demand for corn pickers on the individual level that comes from their marginal revenue product, right? Because the firms want to hire up to the point where the marginal revenue product equals the wage, so as the wage goes up and down, or if the wage changes, well, we're gonna demand a different amount of labor based on that. Right? So at this current wage, just for the sake of example, and that's a demand for corn pickers equals mrp behind me. So at this wage let's say this was the equilibrium wage right here. Well, at that wage, this firm would demand say this many workers right here, right? And that depends on their mrp So if their mrp were to change then their demand would change as well. Okay, so this is the equilibrium wage right here, set by the market and that is where the firm is going to decide how many laborers to hire. Okay, so that mrp curve, that is our demand curve for labor. Alright, so notice we have that equilibrium, we discussed this already, right, The equilibrium occurs in the labor market, just like in the market for goods and service right there, or supply and demand cross. Alright, so, pretty simple. Overall, the main takeaway here is that that mrp the marginal revenue product. Some books call it the value of the marginal product of labor, marginal revenue product. That is the firm's demand curve. Okay, that's the big takeaway here. Cool. Let's go ahead and do a couple practice problems, and then we'll move on to the next topic.
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Problem
Problem
A cupcake shop in a competitive market sells its cupcakes for $20 per dozen. It hires its laborers at a wage of $10 per hour. To maximize its profit, the firm should hire laborers until the marginal product of labor is