Lesson preview · Labor Demand
The Firm's Hiring Decision
~6 min · Free to read
A profit-maximizing firm follows a simple hiring rule: hire workers until (the wage). If , the additional worker generates more revenue than they cost — hire them. If , the worker costs more than they produce — don’t hire. The optimum is where .
Hire until the marginal revenue product of the last worker equals the wage
Tip
Shifts in Labor Demand
The labor demand curve () shifts when:
- Product price changes — higher raises at every quantity.
- Technology improves — higher raises .
- More complementary factors — more capital can raise labor’s .
- Product demand increases — raises , which raises .
Notice the parallel with output markets: just as a firm produces where , it hires where . The wage is the “marginal cost” of labor. The curve plays the role of a demand curve — at higher wages, fewer workers are hired (movement along the curve), and changes in technology or product price shift the curve.
Worked Example
A competitive firm has and the market wage is 80 dollars. How many workers should the firm hire? What happens if the wage rises to 120 dollars?
Check yourself · no marks
If a new technology doubles each worker’s marginal product, what happens to the labor demand curve?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 4
A profit-maximizing firm hires until:
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