Graph walkthrough · Micro · Labor market
Higher output prices, more hiring
The price of solar panels rises, and panel makers see every worker bring in more revenue.
Step 1 of 3 · Before the price rise
Panel assemblers earn 25 dollars an hour and 10 thousand are employed. The horizontal axis is the number of assemblers employed. The vertical axis is the hourly wage. Firms hire until the extra revenue a worker brings in equals the wage. The market is at E₀.
The chain in words
Step 1
Before the price rise
Panel assemblers earn 25 dollars an hour and 10 thousand are employed. The horizontal axis is the number of assemblers employed. The vertical axis is the hourly wage. Firms hire until the extra revenue a worker brings in equals the wage. The market is at E₀.
Step 2
Labor demand shifts right
A worker's marginal revenue product is the extra output they make times the price it sells for. When the panel price rises, every worker is worth more to the firm, so labor demand shifts right. At the old wage of 25 dollars, firms want more assemblers than are available: a shortage of workers.
Step 3
The wage rises, employment rises
Firms bid up wages to fill the posts. The higher wage draws more people into assembly work, a movement along the labor supply curve. The market settles at E₁: a higher wage and more assemblers employed.
Takeaway. Labor demand is derived from product demand: a higher output price raises the marginal revenue product and shifts labor demand right.
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Lesson: Marginal Revenue Product