Labor, Capital, Land, Entrepreneurship

Demand for factors derived from demand for the product

• Marginal Resource Cost MRC/MFC

Value of Marginal Product (VMP): $VMP_L = MP_L \times P$ (competitive product market)

$MRP_L = MP_L \times MR$ (imperfectly competitive product market, Marginal Revenue Product)

Factor demand curve = VMP (or MRP) curve (downward sloping due to diminishing MP)

Profit-maximizing hiring condition: $VMP_L = W$ (or $MRP_L = MCL$)

• Derived Demand: Demand for factors derived from demand for the product
• Marginal Resource Cost MRC/MFC

Labor demand is derived from the demand for the product workers help produce. Factors that increase labor demand:

• Higher product demand
• Higher worker productivity or better technology that complements labor
• Higher prices for the firm's output
• Lower wages of substitute inputs such as capital in complementary settings

Factors that decrease labor demand:

• Lower product demand
• Lower productivity
• Higher wages or lower profitability of hiring labor
• Cheaper substitute inputs that replace workers

Graphically, these factors shift the labor demand curve right or left

Labor supply shows the relationship between wage and the quantity of labor workers are willing to provide. Factors that increase labor supply:

• More workers entering the labor force
• Immigration or population growth
• Better access to training and education
• Greater labor-force participation incentives

Factors that decrease labor supply:

• Fewer workers available
• Changes in preferences toward more leisure
• Barriers to work such as licensing or relocation limits
• Alternative opportunities that pull workers into other markets

Graphically, these factors shift the labor supply curve right or left

Profit-maximizing hiring condition: $VMP_L = W$ (or $MRP_L = MCL$)

Profit-maximizing multi-factor equilibrium: $\frac{VMP_L}{P_L} = \frac{VMP_K}{P_K} = \frac{VMP_T}{P_T} = 1$

Competitive labor market:

• Demand: VMP curve (downward sloping)
• Supply: Positive relationship between wage and labor supplied
• Equilibrium: $W^* = VMP_L$

• Wage differentials (compensating differentials)

Monopsony:

• Single buyer (employer) in labor market
• Faces upward-sloping labor supply -> MLC > W
• Condition: $MRP_L = MLC$
• Result: Lower wages and employment than competitive equilibrium
• Wage differentials (compensating differentials)

Monopsony:

• Single buyer (employer) in labor market
• Faces upward-sloping labor supply -> MLC > W
• Condition: $MRP_L = MLC$
• Result: Lower wages and employment than competitive equilibrium
• Wage differentials (compensating differentials)

Monopsony:

• Single buyer (employer) in labor market
• Faces upward-sloping labor supply -> MLC > W
• Condition: $MRP_L = MLC$
• Result: Lower wages and employment than competitive equilibrium
• Wage differentials (compensating differentials)