8.3.1—Demand for labour

A firm’s demand for labour depends on the marginal revenue product of labour: the extra revenue generated by one more worker, which combines marginal physical product with the value of output.

Demand tends to rise when product demand or price increases, worker productivity improves, or complementary capital becomes more effective. It falls when the wage exceeds the value of the worker’s marginal contribution.

If an extra worker produces 10 units and each sells for $5, marginal revenue product is$50 before considering other changes. A wage below that may make hiring worthwhile; a wage above it may not.

Labour demand is not determined by workers’ preferences alone; it is a derived demand linked to demand for the product and the productivity of labour.