# lec14 - Demand and supply labor FACTOR MARKETS wage SL...

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1 3 FACTOR MARKETS “Factor markets” = markets for inputs Main concept: The market for outputs affects the market for inputs, and vice versa. 4 Demand and supply labor: wage Market L L* W* S L D L 5 How is demand for labor determined? Demand for output creates Demand for labor 6 Marginal Product of Labor MP L = extra output that can be produced with one extra unit of labor L MP L 0-1 10 units 1-2 9 2-3 7 3-4 5 Law of Diminishing MP. 7 How much labor will firm demand? Price of output: P = \$2 Wage rate: w = \$14/hour L MP L PxMP L w 0-1 10 20 14 1-2 9 18 14 2-3 7 14 14 3-4 5 10 14 8 Firm’s demand curve for labor: PxMP L wage l Firm l 1 MP L x P = d l w 1

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2 10 Market demand for labor is sum of firm’s demands. wage wage Firm Market L l MP L x P D L = Σ MP L x P 14 Equilibrium in Market for Labor: wage wage Firm Market L l MP L x P S L D L = Σ MP L x P Equilibrium wage depends on price of output. L* l* w* w* 16 Recall: marginal cost curve is supply curve for firm. \$ \$ Firm Market Q q S = Σ MC D Q* q* p* p* OUTPUT MC 17 \$ \$ Firm Market Q q S = Σ MC(w) D Q* q* p* p* OUTPUT MC(w) Price of output depends on wage.

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