Conclusion: the firm will be facing a MPL curve, which is the main element behind its labor demand curve

To see the relation between MPL and the labor demand curve we must make use of monetary units ($)

Numerical EXAMPLE

3.3 Demand in the short run: perfect competition (product market)

Observations (example):• When MPL is decreasing• (Zone 2, LDR)

• P is fixed, it won’t go down while increasing output• Perfect competition: DC is perfectly elastic (horizontal)

• Columns (1) & (6): DL in the SR• Rule or equilibrium condition (profit max.) MRPL = MWC• MWC = Δ W paid for an additional unit of L• If MRPL > MWC L up• If MRPL < MWC L down

3.3 Demand in the short run: perfect competition (product market)

• Assuming firms are “wage-takers” no effect on W MWC = W MRPL = W

• Competitive firm will use L up until MRPL = W• The DL curve indicates the amount demanded at different

levels of W• Only under perfect competition MRPL = VMPL• Producers can sell all they want at P• The additional sale increases earnings by P x u.• The additional earnings for producing with 1u. more of L = VMPL

3.3 Demand in the short run: perfect competition (product market)

• Most of the firms: some market power• Some effect on prices

• DC is no longer perfectly elastic• Negative slope• Product differentiation • To sell more (while adding L), P should now drop• The sale of 1 extra u. does not contribute as in PC• MRPL ≠ VMPL

• Conclusion: MRPL falls not only by LDR, but also due to the fact that P should drop if we want to sell/produce more

• This cut in P is applicable to all previous units

3.4 Demand in the short run: imperfect competition (product market)

• Numerical EXAMPLE

• As before: MRPL = W D’L curve• Ceteris paribus, D’L is less elastic than DL

• That is, firms with certain monopolistic power are less affected by changes of W

• Higher restriction on output fewer workers• It is more beneficial to produce less• MRPL (in PC) = VMPL > MRPL (under IC)

3.4 Demand in the short run: imperfect competition (product market)

Demand in the short run

Summing up:1. DL is a derived demand of DC

2. Insofar as L increases (with K), YC increases:• First, at a growing rate (MPL up)• Then at a decreasing rate (MPL down)• But later, it becomes negative (MPL < 0)

3. MRPL = W MRPL in zone 2 is the DL

4. Under IC, YC and L are restricted MRPL ≠ VMPL

3.5 Demand in the long-run• L & K are both variable• YLR = f ( L, K )• DL* indicates the L that firms employ at each W with L & K

variables• In introducing t, we can now think of substitution• Scale effect: ΔL as a result of ΔY (due to ΔW, Δcosts)• Substitution effect: ΔL as a result of ΔRP (due to ΔW)

• Consequence: DL* is more elastic than DL

• Other factors which make it even more elastic:• DC

• Interactions K-L• Technology