Market factor demand adds firms’ input demands
Product-market conditions can shift an entire occupation’s demand.
When capital and labor are substitutes in production, a fall in the rental price of capital will generally
- shift labor demand right as output contracts
- move the firm upward along its labor-demand curve
- raise labor’s marginal product at every employment level
- leave the cost-minimizing input mix unchanged
- shift labor demand left through input substitution
shift labor demand left through input substitution Cheaper capital encourages substitution away from labor when the inputs can replace one another.
Demand for a firm’s product increases, raising the product’s price while worker productivity is unchanged. The firm’s demand for labor will most likely
- shift left because labor becomes more expensive
- remain unchanged because marginal product is unchanged
- become perfectly elastic
- move down along the existing labor-demand curve
- shift right because marginal revenue product rises
shift right because marginal revenue product rises The additional output produced by labor is now more valuable, so MRP and labor demand rise.
A machine increases each worker’s marginal product. Other things equal, the change will
- reduce labor demand because capital replaced labor
- move the firm along labor supply
- reduce the product’s marginal revenue
- increase the marginal revenue product of labor
- affect labor demand only if wages also rise
increase the marginal revenue product of labor Higher marginal product raises each worker’s added revenue contribution, shifting labor demand right.
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If demand for home construction rises, the product price and marginal revenue associated with carpentry can rise, shifting carpenter demand right. Training that raises productivity also raises MRP. A decline in the price of a substitute input can shift labor demand left as firms adopt the substitute.
Elasticity of factor demand is greater when product demand is elastic, other inputs substitute easily, the input is a large share of cost, and firms have more time to alter production methods. These determinants explain why the same wage increase produces different employment responses across industries.
Market labor demand is the horizontal sum of employers’ MRP schedules. At a wage of $20, one employer may want 8 workers and another 12, giving market quantity demanded of 20. Add quantities at the same wage. Do not add wages or average firm employment.
An output-market event can shift an occupation’s demand across many firms. If demand for home renovation rises, contractors’ output prices or marginal revenues rise, raising the MRP of carpenters and shifting market carpenter demand right. If consumers shift away from printed newspapers, the derived demand for some printing labor can fall even if workers’ physical skills are unchanged.
Technology can substitute for one kind of labor and complement another. A diagnostic machine may reduce demand for routine image processing while increasing the productivity and MRP of technicians who maintain it. The word “technology” does not determine one universal labor-demand direction. Identify the production relationship named in the stem.
| Determinant | Labor-demand channel | Likely direction |
|---|---|---|
| Output demand rises | Raises product MR or price | Right |
| Training raises MP | More output per worker | Right |
| Price of a substitute input falls | Firms substitute away from labor | Left |
| Price of a complement falls | Complement use raises labor MP or scale | Often right |
| Number of employers rises | More firm demands are summed | Right |
Factor-demand elasticity asks how strongly employment responds to wage. It tends to be greater when product demand is elastic, the input has close substitutes, labor is a large cost share, and firms have time to redesign production. These are Hicks-Marshall-style determinants expressed in intuitive terms: easier avoidance produces a larger response.
Cost share affects response
A 10 percent wage increase has a small effect on a service for which the relevant labor is 2 percent of total cost, but can strongly affect a labor-intensive service in which it is 60 percent. Other conditions equal, the second employer has more reason to change output, price, or production method.
Market labor demand is not the number of people currently employed. Employment is the equilibrium quantity after demand meets labor supply. A demand shift can change both wage and employment, and the movement along supply should not be mislabeled a supply shift.
When an exam describes a growing product market, complete the chain: product demand right, product value or MR up, MRP of the input right, equilibrium factor price and quantity up under ordinary supply. Stop at the variable the stem asks for.
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