3.3 Demand in the short run: perfect
competition (product market)
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: DC is perfectly elastic (horizontal)
• Columns (1) & (6): DL 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 DL 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
3.4 Demand in the short run: imperfect
competition (product market)
• Most of the firms: some market power
• Some effect on prices
• DC 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 DL
• 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)
Demand in the short run
Summing up:
1. DL is a derived demand of DC
2. Insofar as L increases (with K), YC 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 DL
4. Under IC, YC and L are restricted  MRPL ≠ VMPL
3.5 Demand in the long-run
• L & K are both variable
• YLR = f ( L, K )
• DL* 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: DL* is more elastic than DL
• Other factors which make it even more elastic:
• DC
• Interactions K-L
• Technology