### Presentation 7

```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
```