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: D C is perfectly elastic (horizontal) Columns (1) & (6): D L 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 D L 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 D C 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 D L 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.D L is a derived demand of D C 2.Insofar as L increases (with K), Y C 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 D L 4.Under IC, Y C and L are restricted  MRPL ≠ VMPL

3.5 Demand in the long-run L & K are both variable Y LR = f ( L, K ) D L * 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: D L * is more elastic than D L Other factors which make it even more elastic: D C Interactions K-L Technology