1. © 1999 Michigan State University. All rights reserved.
Microeconomics
Market for Labor
© 1999 Michigan State University. All rights reserved.

2. What determines how many workers a firm will hire?
Will depend on the firm’s demand for and supply of labor

3. The firm's demand for labor
A derived demand.
Derived from two components
The contribution of the extra worker to output (marginal product of labor).
The extra revenue from selling that output.
The value of the marginal product of labor =
(MPL ) x ( Price of product )
Labor markets

4. Let us now derive the demand for labor by our Apple Firm

5. APPLE PRODUCTION IN A MICHIGAN ORCHARD
Labor
Output
Marginal product
Output
VMP
(worker-days)
(bu.)
(bu./worker-day)
price
100
4000
40.0
200
16000
120.0
300
27000
110.0 $7
$770
400
32000
50.0 $7
$350
531
34000
15.3 $7
$107
656
35000
8.0 $7
$56
799
36000
7.0 $7
$49
960
37000
6.2 $7
$43
1165
38000
4.9 $7
$34
1411
39000
4.1 $7
$28
5500
45000
1.5 $7
$10
Labor markets

6. APPLE PRODUCTION IN A MICHIGAN ORCHARD
Labor
Output
Marginal product
Output
VMP
(worker-days)
(bu.)
(bu./worker-day)
price
100
4000
40.0 $7
$280
200
16000
120.0 $7
$840
300
27000
110.0 $7
$770
400
32000
50.0 $7
$350
531
34000
15.3 $7
$107
656
35000
8.0 $7
$56
799
36000
7.0 $7
$49
960
37000
6.2 $7
$43
1165
38000
4.9 $7
$34
1411
39000
4.1 $7
$28
5500
45000
1.5 $7
$10
Labor markets

7. The firm's demand for labor.
VMP DL
LABOR
Labor markets

8. The firm's quantity of labor hired.
VMP
SL=wage
656 labor-days DL
LABOR
Labor markets

9. The firm's demand for labor.
VMP DL
LABOR
Labor markets

10. wage wage D” S $85 $56 D labor L Industry labor Firm labor
Labor markets

11. A Government imposed binding minimum wage
w(min)
Wage can't fall below this level so there's always a labor surplus. D
labor
Labor markets