Labor demand
Encyclopedia
In economics
, labor demand refers to the number of hours of hiring that an employer is willing to do based on the various exogenous (externally determined) variables it is faced with, such as the wage rate, the unit cost of capital
, the market-determined selling price of its output, etc. The function specifying the quantity of labor that would be demanded at any of various possible values of these exogenous variables is called the labor demand function.
is determined by the following profit maximization
problem:
where p is the exogenous selling price of the produced output, Q is the chosen quantity of output to be produced per month, w is the hourly wage rate paid to a worker, L is the number of labor hours hired (the quantity of labor demanded) per month, r is the cost of using a machine (capital) for an hour (the "rental rate"), K is the number of hours of machinery used (the quantity of capital demanded) per month, and f is the production function
specifying the amount of output that can be produced using any of various combinations of quantities of labor and capital. This optimization problem involves simultaneously choosing the levels of labor, capital, and output. The resulting labor demand, capital demand, and output supply functions are of the general form
and
Ordinarily labor demand will be an increasing function of the product's selling price p (since a higher P makes it worthwhile to produce more output and to hire additional units of input in order to do so), and a decreasing function of w (since more expensive labor makes it worthwhile to hire less labor and produce less output). The rental rate of capital, r, has two conflicting effects: more expensive capital induces the firm to substitute away from physical capital usage and into more labor usage, contingent on any particular level of output; but the higher capital cost also induces the firm to produce less output, requiring less usage of both inputs; depending on which effect predominates, labor demand could be either increasing or decreasing in r.
for the product. So its profit-maximization problem is
where Q(p) is the market demand function for the product. The constraint equates the amount that can be sold to the amount produced. Here labor demand, capital demand, and the selling price are the choice variables, giving rise to the input demand functions
and the pricing function
There is no output supply function for a monopolist, because a supply function pre-supposes the existence of an exogenous price.
where L(w) is the market labor supply function of workers which faces the firm. Here the firm cannot choose an amount of labor to demand independently of the wage rate, because the wage rate is not exogenous; therefore there is no labor demand function.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, labor demand refers to the number of hours of hiring that an employer is willing to do based on the various exogenous (externally determined) variables it is faced with, such as the wage rate, the unit cost of capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
, the market-determined selling price of its output, etc. The function specifying the quantity of labor that would be demanded at any of various possible values of these exogenous variables is called the labor demand function.
Perfect competitor
The labor demand function of a competitive firmPerfect competition
In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets...
is determined by the following profit maximization
Profit maximization
In economics, profit maximization is the process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem...
problem:
where p is the exogenous selling price of the produced output, Q is the chosen quantity of output to be produced per month, w is the hourly wage rate paid to a worker, L is the number of labor hours hired (the quantity of labor demanded) per month, r is the cost of using a machine (capital) for an hour (the "rental rate"), K is the number of hours of machinery used (the quantity of capital demanded) per month, and f is the production function
Production function
In microeconomics and macroeconomics, a production function is a function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs...
specifying the amount of output that can be produced using any of various combinations of quantities of labor and capital. This optimization problem involves simultaneously choosing the levels of labor, capital, and output. The resulting labor demand, capital demand, and output supply functions are of the general form
and
Ordinarily labor demand will be an increasing function of the product's selling price p (since a higher P makes it worthwhile to produce more output and to hire additional units of input in order to do so), and a decreasing function of w (since more expensive labor makes it worthwhile to hire less labor and produce less output). The rental rate of capital, r, has two conflicting effects: more expensive capital induces the firm to substitute away from physical capital usage and into more labor usage, contingent on any particular level of output; but the higher capital cost also induces the firm to produce less output, requiring less usage of both inputs; depending on which effect predominates, labor demand could be either increasing or decreasing in r.
Monopolist
If the firm is a monopolist, its optimization problem is different because it cannot take its selling price as given: the more it produces, the lower will be the price it can obtain for each unit of output, according to the market demand curveDemand curve
In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule...
for the product. So its profit-maximization problem is
where Q(p) is the market demand function for the product. The constraint equates the amount that can be sold to the amount produced. Here labor demand, capital demand, and the selling price are the choice variables, giving rise to the input demand functions
and the pricing function
There is no output supply function for a monopolist, because a supply function pre-supposes the existence of an exogenous price.
Monopsonist in the labor market
If the firm is a monopsonist in the labor market — meaning that it is the only buyer of labor, so the amount it demands influences the wage rate — then its optimization problem iswhere L(w) is the market labor supply function of workers which faces the firm. Here the firm cannot choose an amount of labor to demand independently of the wage rate, because the wage rate is not exogenous; therefore there is no labor demand function.
See also
- Conditional factor demandsConditional factor demandsIn economics, a conditional factor demand function specifies the cost-minimizing level of an input such as labor or capital, required to produce a given level of output, for given unit input costs of the input factors...
- Labour economics#Neoclassical microeconomic model .E2.80.94 Demand