Shifts in demand for labor | Microeconomics | Khan Academy

We are now going to continue our study of labor markets, and in this video we're going to focus on the demand curve for labor. So, let's imagine that we're talking about a market for people who work in the pant-making industry. So each of these firms right over here, they produce pants. Let's say they produce bell bottoms.

So this is my quick drawing of bell bottoms. These are someone's pants right over here. They flare out at the bottom. And let's say for some strange reason bell bottoms all of a sudden go back in style. So, bell bottoms are going back in style. The firm is, at least in the short run, able to get more per unit for its bell bottom, so its marginal revenue goes up.

And if its marginal revenue goes up, its marginal revenue product is going to go up. And so we would have a shift to the right of the marginal revenue product curve, or you could even view that as a shift up. For a given quantity of labor, you're going to have a higher marginal revenue product. So this, we could call this marginal revenue product curve 2.

Now, what was likely to happen in the market? Well, if it's a general fashion trend, it's not just for this firm's goods or product, but it's for everyone, all of the pant producers. Well, then they're all going to want a lot more people who can work in the pant-producing industry. Or another way to think about it is the market labor demand curve is just a sum of the marginal revenue product curves for all of the various firms.

And if all of them have shifted to the right or shifted up, well, the same thing is going to happen to the market labor demand curve. And so the market labor demand curve might now look like this: market labor demand curve sub 2.

Now, what does that do to the equilibrium wages and quantities? Well, our equilibrium wage has gone up, which seems reasonable because the demand curve has shifted to the right, and our equilibrium quantity has also gone up. I'll put a Q sub 2.

Now, what does that do to the marginal factor cost for the firms operating in this market, the ones that are hiring this labor? Well, the wages have gone up, so has the marginal factor cost. So, in this situation, we now have a marginal factor cost sub 2. And now we have a new quantity that is rational for this firm to actually go out and hire.

And you can imagine things going the other way. So here we saw things shift to the right, both the marginal revenue product curves and the market labor demand curve. But maybe things aren't going well, and the marginal revenue goes down for these firms.

Well then, you can imagine a situation where on the firm level, your marginal revenue product curve shifts down and to the left. Maybe it does something like that: marginal revenue product three. And in aggregate, that would cause the market labor demand curve to shift to the left.

You would see the opposite happen. You would see a lower equilibrium wage, let me just label this market labor demand curve 3. You would have a lower equilibrium wage now, and you would have a lower quantity of labor—equilibrium quantity of labor in that market sub 3.

And then you would have a lower marginal factor cost, assuming a perfectly competitive labor market. And so this might be the equilibrium quantity right over there: Q for the firm sub 3 with a star.

Once again, not counterintuitive; this is what we've seen in other markets when we talked about what would cause shifts in demand. If the firms, for whatever reason, are not able to get as much incremental benefit per unit for an extra unit of labor, well, that's going to shift things to the left, both at the firm level and at the market level.

And if for some reason the firms are able to get a lot more incremental benefit per extra unit of labor, well, that's going to shift both the marginal revenue product at the firm level to the right and the market labor demand curve at the market level to the right.