Labor Demand and Supply in a Perfectly Competitive Market

Labor Demand and Supply in a Perfectly Competitive Market -...

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Labor Demand and Supply in a Perfectly Competitive Market In addition to making output and pricing decisions, firms must also determine how much of each  input  to demand. Firms may choose to demand many different kinds of  inputs. The two most  common are  labor  and  capital.   The demand and supply of labor are determined in the  labor market.  The participants in the labor  market are  workers  and  firms.  Workers  supply  labor to firms in exchange for  wages.  Firms  demand  labor from workers in exchange for wages.  The firm's demand for labor.  The  firm's demand for labor  is a  derived demand ; it is derived from  the demand for the firm's  output.  If demand for the firm's output increases, the firm will demand  more labor and will hire more workers. If demand for the firm's output falls, the firm will demand less  labor and will reduce its work force.  Marginal revenue product of labor.
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Unformatted text preview: When the firm knows the level of demand for its output, it determines how much labor to demand by looking at the marginal revenue product of labor. The marginal revenue product of labor (or any input) is the additional revenue the firm earns by employing one more unit of labor. The marginal revenue product of labor is related to the marginal product of labor. 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. The total product, marginal product, and marginal revenue product that the firm receives from hiring 1 to 5 workers are reported in Table 1 ....
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