Factor Markets ‹ 143Market Wage as Supply of Labor
Under the assumptions of a perfectly competitive labor market, the supply of labor to the
individual firm is perfectly elastic and equal to the wage. This means that the firm can
employ all of the workers it desires at the going market wage.- In competitive markets, MRPLis the firm’s labor demand curve.
- In competitive markets, wage is the firm’s labor supply curve.
Derived Demand
Economists say that the demand for an input like labor is derived from the demand for the
goods produced by the input. If the weather is hot and demand for lemonade rises, local
economists might predict a stronger demand for production resources like lemonade work-
ers, lemons, and sugar. An increase in the demand for a resource means that at any wage,
the firm wishes to employ more of that resource. If the demand for lemonade increases and
the price rises to $1 per cup, the MRPLincreases at all quantities of labor. This is seen in
Figure 10.2.- You are very likely to see the topic of derived demand on the AP exam. To avoid losing
points on the free-response question, you mustmake the connection between the price
of the product rising and the increased demand for the labor. - ≠D for product, ≠price of product, ≠MRPL, ≠hiring of labor at the current wage.
MRPL = demandW 1 = supplyW 2W 3$Quantity
Labor107.5052 3 4Figure 10.1KEY IDEA
TIPMRP as Demand for Labor
If the hourly wage were to rise to $10, Molly would reduce her employment to two work-
ers per hour. If the wage decreases to $5 per hour, she would employ four workers. All else
equal, as the price of labor increases, the employment falls and as the price of labor
decreases, employment rises. This is the law of demand again! Figure 10.1 illustrates the
MRPLand Molly’s hiring at three wages.
Molly’s demand for labor is actually represented by the MRPL. It is downward sloping,
like any demand curve would be, because of the diminishing marginal productivity of labor
in the short run. To move from Molly’s demand for labor to the overall market demand for
labor, we simply sum up all of the individual firms’ MRPLcurves: Market DL=SMRPL.KEY IDEATIP