BSBA-MM1

THE DEMAND AND

SUPPLY OF LABOR
IN MARKET
BASIC MICROECONOMICS
Romel Gacos
Aliza May Estopace
Jamaica Pearl Hermosa
Maybelle Habitan
Kim Mendoza
Marie Son Jazareno
 DEMAND AND
SUPPLY OF LABOR
The demand and supply of labor are determined in
the labor market. The participants in the labor
market are workers and firms. Workers supply
labor to firms in exchange for wages. Firms
demand labor from workers in exchange for wages.
Market demand and supply of labor. Many
different markets for labor exist, one for every
type and skill level of labor.
 DEMAND IN LABOR
The firm's demand for labor. The firm's demand for
labor is a derived demand; it is derived from the
demand for the firm's output. If demand for the firm's
output increases, the firm will demand more labor and
will hire more workers. If demand for the firm's output
falls, the firm will demand less labor and will reduce
its work force.
The Market demand for labor—the amount of labor that
all the firms participating in that market will demand at
different market wage levels.
Marginal revenue product of labor- when the firm knows
the level of demand for its output, it determines how
much labor to demand by looking at the marginal revenue
product of labor. In a perfectly competitive market, the
firm's marginal revenue product of labor is the value of
the marginal product of labor.
For example, consider a perfectly competitive firm that uses
labor as an input. The firm faces a market price of $10 for
each unit of its output. The total product, marginal product,
and marginal revenue product that the firm receives from
hiring 1 to 5 workers are reported in Table .
The marginal revenue
product of each
additional worker is
found by multiplying
the marginal product
of each additional
worker by the market
price of $10. The
marginal revenue
product of labor is
the additional
revenue that the firm
earns from hiring an
additional worker; it
represents the wage
that the firm is
willing to pay for
each additional
worker.
Marginal Cost Of Labor-the amount the firm must pay
for each additional worker that it hires.
The perfectly competitive firm's profit‐maximizing
labor‐demand decision is to hire workers up to the point
where the marginal revenue product of the last worker
hired is just equal to the market wage rate, which is the
marginal cost of this last worker.
For example, if the market wage rate is $50 per worker per
day, the firm—whose marginal revenue product of labor is
given in Table —would choose to hire 3 workers each day.
The Firm's Labor Demand Curve-The firm's profit‐
maximizing labor‐demand decision is depicted
graphically in Figure .
A perfectly competitive firm's profit maximizing labor-
demand decision

This figure graphs the marginal
revenue product of labor data
from Table along with the market
wage rate of $50. When the
marginal revenue product of labor
is graphed, it represents the firm's
labor demand curve. The demand
curve is downward sloping due to
the law of diminishing returns; as
more workers are hired, the
marginal product of labor begins
declining, causing the marginal
revenue product of labor to fall as
well. The intersection of the
marginal revenue product curve
with the market wage determines
the number of workers that the
firm hires, in this case 3 workers.
 SUPPLY IN LABOR
AN INDIVIDUAL'S SUPPLY OF LABOR depends on his or
her preferences for two types of “goods”:
consumption goods and leisure.
 Consumption Goods- include all the goods that can be
purchased with the income that an individual earns from
working.
The Market Supply Of Labor- is the number of workers
of a particular type and skill level who are willing to
supply their labor to firms at different wage levels.
Leisure- is the good that individuals consume when they
are not working. By working more (supplying more labor),
an individual reduces his or her consumption of leisure
but is able to increase his or her purchases of
consumption goods.
IN CHOOSING BETWEEN LEISURE AND CONSUMPTION, THE
INDIVIDUAL FACES TWO CONSTRAINTS.

1. First, the individual is limited to twenty‐four hours per day

for work or leisure.
2. Second, the individual's income from work is limited by
the market wage rate that the individual receives for his or
her labor skills.
AN INDIVIDUAL'S LABOR SUPPLY CURVE. AN EXAMPLE OF AN
INDIVIDUAL'S LABOR SUPPLY CURVE IS GIVEN IN FIGURE .

As wages increase, so does the

opportunity cost of leisure. As
leisure becomes more costly,
workers tend to substitute more
work hours for fewer leisure hours
in order to consume the relatively
cheaper consumption goods,
which is the substitution effect of
a higher wage.
An INCOME EFFECT is also
associated with a higher wage. A
higher wage leads to higher real
incomes, provided that prices of
consumption goods remain
constant.
 SHIFTS IN LABOR DEMAND
The demand curve for labor shows the quantity of labor employers
wish to hire at any given salary or wage rate, under the ceteris
paribus assumption. A change in the wage or salary will result in a
change in the quantity demanded of labor. If the wage rate
increases, employers will want to hire fewer employees. The
quantity of labor demanded will decrease, and there will be a
movement upward along the demand curve. If the wages and
salaries decrease, employers are more likely to hire a greater
number of workers. The quantity of labor demanded will increase,
resulting in a downward movement along the demand curve.
Demand can also increase or decrease (shift) in response to
several factors.
Demand for Output-When the demand for the good
produced (output) increases, both the output price and
profitability increase. As a result, producers demand
more labor to ramp up production.
Education and Training-A well-trained and educated
workforce cause an increase in the demand for that labor
by employers. Increased levels of productivity within the
workforce will cause the demand for labor to shift to the
right.
Technology- Technology changes can act as either
substitutes for or complements to labor. When
technology acts as a substitute, it replaces the need for
the number of workers an employer needs to hire.
Number of Companies-An increase in the number of
companies producing a given product will increase the
demand for labor resulting in a shift to the right.
Government Regulations- Complying with government
regulations can increase or decrease the demand for
labor at any given wage. In the healthcare industry,
government rules may require that nurses be hired to
carry out certain medical procedures.
Price and Availability of Other Inputs- Labor is not the
only input into the production process.
For example, a salesperson at a call center needs a
telephone and a computer terminal to enter data and
record sales.
 SHIFTS IN LABOR SUPPLY
The supply of labor is upward-sloping and adheres to the law of
supply: The higher the price, the greater the quantity supplied and
the lower the price, the less quantity supplied.
lists some of the factors that will cause the supply to increase or
decrease.
Number of Workers- An increased number of workers
will cause the supply curve to shift to the right.
Required Education-The more required education, the
lower the supply.
Government Policies-On the one hand, the government
may support rules that set high qualifications for certain
jobs: academic training, certificates or licenses, or
experience.
Technology and Wage Inequality: The Four-Step
Process-Economic events can change the equilibrium
salary (or wage) and quantity of labor. Consider how the
wave of new information technologies, like computer and
telecommunications networks, has affected low-skill and
high-skill workers in the U.S. economy.
THANK YOU