Ch3 pp. 59-70
What is labor demand?
A firm’s demand for labor is function, or schedule, describing how
much (what quantity of) labor the firm would like to hire at different
This firm would be willing to hire 10 workers at a wage of $18/hour
or 20 workers at a wage of $12/hour.
10 20 Quantity (number of workers)
Labor demand: L(W)
Inverse labor demand: W(L)
Our goal is to use certain information about a firm and the markets it
participates in to determine the firm’s labor demand.
Labor demand is said to be a
because firms need labor in
order to produce goods and services which provide revenue to the firm.
In our model, a firm operates in the following way:
Q = F(L,K)
The firm chooses input quantities, L and K.
For a given input combination, L and K, the total cost to
the firm is the cost of labor, W*L plus the cost of capital,
TC = W*L + C*K
W is the price of labor (wage) and C is the price of capital.
Revenue and Profit
For a given input combination, L and K, the output of the firm is
given by the production function Q = F(L,K).
An example of a production function is:
Q = F(L,K) = 10*L
For a given output level, Q, total revenue is the price in the output
market, P, times the quantity of output, Q.
TR = P*Q = P*F(L,K)
, is equal to total revenue minus total cost.
= TR – TC = P*F(L,K) – W*L – C*K
A Note on Market Structure
By giving W, C and P as parameters, rather than functions of L, K
and Q, respectively, we implicitly assumed that the labor, capital and
output markets were all competitive.
We say that the firm does