Demand for Labor and Minimum Wage Why is the demand for labor called a derived demand? In the labor market, what are the firms demand curve for labor -

Demand for Labor and Minimum Wage
Why is the demand for labor called a derived demand?
In the labor market, what are the firms demand curve for labor and the workers supply curve of labor?
How is a firms wage normally determined in the labor market?
How could Amazon decide to raise its minimum wage to $15 per hour, despite the federal minimum wage being fixed at $7.25 per hour?
What are positive and negative effects of Amazon raising its minimum wage to $15 per hour on its employees, total revenue, and other companies and their employees?

Your initial post should be a minimum of 300 words.

Don't use plagiarized sources. Get Your Custom Assignment on

Demand for Labor and Minimum Wage Why is the demand for labor called a derived demand? In the labor market, what are the firms demand curve for labor

From as Little as $13/Page

12 Marginal Productivity Theory and Labor Markets

dmaroscar/iStock/Thinkstock

Learning Outcomes

After reading this chapter, you should be able to

Explain what makes the demand for labor different from the demand for final goods.

Describe how a profit-maximizing firm in pure competition decides how much labor to employ in terms of
its marginal revenue product and marginal resources cost.

Use a resource market diagram to illustrate the use of labor under pure competition versus monopoly in
the product market.

Determine the factors that affect the elasticity of demand for labor and describe possible causes for a shift
in the demand for labor.

Explain the role of productivity, race, and comparable worth in determining labor income.

258

Section 12.1Special Features of the Demand for Labor

Introduction
After decades of efforts to reduce immigration, the net flow across the U.S.Mexico bor-
der reversed in 2005. By 2018 there werent enough new immigrants to satisfy Californias
demand for agricultural workers. Employing almost 500,000 farmworkers, California was left
with a different kind of drought than it was used to facing: a drought in the immigrant labor
force.

As the supply of labor continued to fall, wages for crop production in California climbed 13%
from 2010 to 2015. The increase in wages has incentivized farmers to make changes to their
production strategies. In some cases, farmers have substituted less labor-intensive crops for
the more labor-intensive counterpartsfor example, switching from grapes and vegetables
to almonds.

Other farmers have chosen to invest in agricultural technology (so-called ag-tech). For exam-
ple, a firm called Ramsay Highlander developed a robotic machine that uses a band saw to
mow rows of baby lettuce and other greens like cabbage and celery. The machine reduced
the need for labor by about 60%. However, for asparagus, which requires careful hand and
knife harvesting, this may not be a solution; asparagus-harvesting machines have failed to
replicate human dexterity.

Economists predicted that these changes would occur, primarily increased wages and greater
mechanization in production techniques, far in advance of actually observing the reduced
immigration resulting from additional crackdowns. This chapter will explain how economists
knew what the future agricultural labor market would look like and why.

12.1Special Features of the Demand for Labor
Earlier in this book, we examined the circular flow of a basic economy. It shows the firm
involved in two markets: the product market and the resource market. Figure 12.1 repro-
duces the circular flow diagram from Chapter 2. We have studied the theory of the firm in the
product market, the upper half of the circular flow diagram. We now turn our attention to the
theory of the firm in the largest part of the resource market, the labor market.

259

Section 12.1Special Features of the Demand for Labor

The demand for labor is similar to other types of demand we have studied. In earlier chapters,
we described product markets, in which firms or individuals sell the goods and services they
produce to consumers. Now we will examine the labor market, the market in which firms
buyor rentthe services of labor from individuals. We can adopt many of the same analyti-
cal tools we used to study product markets. There are, however, some differences between
labor and product markets, and we will concentrate on these differences.

The demand for labor has three features that make it somewhat different from the demand
for a product. The first is that the demand for labor is derived demand. A firm demands labor
because the labor can be used to produce goods that consumers are demanding. The demand
for labor is thus derived from the demand for the product the firm produces. If there were
no consumer demand for products made from wood, there would be no demand for loggers.
This principle holds for all productive resources. They are only valuable to a firm if they help
produce products that consumers value.

Figure 12.1: The circular flow of income

Households purchase goods and services and supply land, labor, capital, and enterprise. Firms buy
these productive resources and supply goods and services. In the product market, buyers and sellers
exchange goods and services. In the resource market, buyers and sellers exchange the services or
productive resources.

Go
ods and services

Co
ns

um
er s

pend
ing for goods and servicesP

ROD
UCT MARKET

Labor, land, capital, and
en

ter
pr

is
e

Wages, rent, interest, and
pro

fit

RESOURCE MAR
KE

260

Section 12.2The Market for Labor With Perfect Competition

The second feature of the demand for labor is that it is interdependent demand. It depends
on the demand for other inputs. In other words, the amount of labor demanded will depend
on the amounts of other inputs a firm plans to use. The amount of labor a firm demands
depends on the amounts of land, capital, and enterprise that will be used in combination
with the labor. It is also true that the demand for most products is interdependent with the
demand for other products. Recall that almost all goods have substitutes, and many goods
have complements. However, the interdependence of the demand for labor with the demand
for other productive resources is unusual in that the other resources can be both comple-
ments and substitutes at the same time.

The third feature is that the demand for labor is in part technologically determined demand.
That is, the demand for labor will depend on techniques of production and on technologi-
cal progress, or the production function. Recall that the production function tells how much
labor is needed to produce a certain level of output, given a certain production process and
amounts of the other productive resources of production. This technological relationship can
change with new inventions and new innovations. Any change resulting in a new technology
or a new innovation will have an impact on the demand for productive resources, including
labor.

These three elements are combined in marginal productivity theory, which was originally
developed by John Bates Clark. Marginal productivity theory explains how the distribution
of income is determined in a market system. Each input is paid according to its contribution,
or its marginal productivity. The more productive inputs will be paid more. We will follow
Clarks lead by developing marginal productivity theory in terms of labor supply and demand.

Check Point: Special Characteristics of Resource Markets

Demand is derived from the demand for the final product.
Demand is interdependent with demand for other inputs.
Demand is technologically determined.

12.2The Market for Labor With Perfect Competition
Remember that a demand curve shows the relationship between price and quantity demanded.
A demand curve for labor shows how much labor will be demanded at various wage rates. In
order to develop a theory about the market demand for labor, we start by asking how much
labor an individual firm will employ at various wage rates. Then we horizontally sum the
quantities for all firms in the same way we added individual demand curves to find the mar-
ket demand for a product.

261

Section 12.2The Market for Labor With Perfect Competition

Demand for Labor
What determines the firms demand for labor? Suppose the production function is such that,
as the firm increases the amount of labor employed, assuming everything else remains the
same, the resulting increases in the amount of total product become smaller. This production
function reflects the principle of diminishing marginal productivity, which we discussed in an
earlier chapter. Holding constant the quantities of land and capital, it is possible to determine
how the firms output varies with the quantity of labor it uses. As the firm employs more labor
in combination with fixed amounts of the other inputs, the additional amounts of output per
additional unit of labor eventually decline. If this were not the case, it would be theoretically
possible to grow the entire worlds supply of wheat on 1 acre of land just by employing more
workers.

Consider a farmer selling corn in a perfectly competitive product market and also buying
labor in a perfectly competitive labor market. This means that the farmer will take both the
price of the farms product and the price of labor as given. Table 12.1 shows the total product
(or total amount of corn) associated with various amounts of labor inputs for the farm. This
output depends on the technical relationship defined by the production function. Once we
know the total product, we can determine how much extra product is produced when labor
inputs are added. That value is the marginal product of that unit of labor (MPL). It is the mar-
ginal product because the output is in physical units, such as number of autos, tons of coal, or
bushels of corn.

Table 12.1: The demand for labor in a perfectly competitive product market

Units of
labor

Total
product

Marginal
product
of labor
(MPL)

Product
price

Total
revenue

Value of
marginal
product
of labor
(VMPL)

Marginal
revenue
product
of labor
(MRPL)

0 0 0 $2 $0 $0 $0

1 10 10 2 20 20 20

2 18 8 2 36 16 16

3 24 6 2 48 12 12

4 28 4 2 56 8 8

5 30 2 2 60 4 4

To put a market value on the additional output, we simply multiply the number of added units
of the product by the price at which the firm can sell it. This value is called the value of the
marginal product of labor (VMPL). It is listed in the sixth column of Table 12.1. The VMPL,
which is P MPL, is a measure of the value of the additional output that each additional unit of
labor adds to the firms total. The marginal revenue product of labor (MRPL) is the amount

262

Section 12.2The Market for Labor With Perfect Competition

that an additional unit of labor adds to the firms total revenue. It is found in the seventh col-
umn of Table 12.1. It is found by multiplying MR by MPL. With perfect competition in the prod-
uct market, VMPL = MRPL. These values are equal because the product price remains constant
(P = MR). The firm can produce and sell as much as it wants at the market-determined price,
which is $2 in this example. When the firm faces a given price, marginal revenue is exactly
equal to that price in the model of perfect competition. Later in this chapter, we will look at
how the value of the marginal product and the marginal revenue product differ when there is
monopoly power in the product market.

The values of VMPL and MRPL from Table 12.1 are plotted on a graph in Figure 12.2. The MRPL
curve is the firms demand curve for labor. It shows the value of each additional unit of labor
to the firm. Thus, it shows how much labor the firm will purchase at various prices (wage
rates). If you know the price of labor, you will be able to determine how much labor this firm
will demand.

Economics in Action: Behind Farm to Table: The Labor of
Farming

Watch a panel of farmers, chefs, and farm advocates address the challenges of 21st-century
farming, including attracting a younger generation to this notoriously difficult field: https://
youtu.be/jLFFfBkiD9M.

Figure 12.2: The farmers demand for labor in a perfectly competitive product
market

The marginal revenue product of labor (MRPL) curve is the farmers demand curve for labor. When the
product market is perfectly competitive, MRPL and VMPL are identical.

63 5421

Price,
cost

Quantity/
time period

VMP
L
= MRP

L
= D

263

Section 12.2The Market for Labor With Perfect Competition

Supply of Labor
An individuals supply curve of labor looks like the other supply curves we have considered.
As wage rates rise, the quantity of labor supplied increases. This supply curve of labor, like
most supply curves, is upward sloping. As wage rates rise, an individual will want to work
more hours. In general, as wages rise, more people will choose to give up leisure in favor of
more income. The trade-off between earning income or consuming leisure is the substitution
effect of a wage increase. As wages rise, individuals will substitute the increased consump-
tion of goods and services, represented by higher wages, for leisure. This substitution effect
occurs along the upward-sloping portion of Figure 12.3.

Figure 12.3: An individuals labor supply curve

When wages rise, the substitution effect for an individual exceeds the income effect, making the labor
supply curve upward sloping. The quantity of labor supplied increases as wages increase. Up to some
point, the income effect dominates. Above that point, a wage of $40 per hour here, further increases in
the wage rate cause the quantity of labor supplied to decrease.

$40

$30

$20

Wage rate
(dollars/hour)

Quantity of labor supplied (hours/week)

There is also an income effect associated with the increased income brought about by a wage
increase. Individuals want to consume more leisure at higher incomes because leisure is a
normal good. The income effect of a higher wage is that individuals want to supply a lower
quantity of labor. At some point, the income effect of a wage increase could dominate the sub-
stitution effect. In that case an increase in the wage rate would bring about a decrease in the
quantity of labor supplied. This is represented by the crook in the individuals supply curve
in Figure 12.3. For this individual, an increase in the wage rate above $15 per hour causes the
quantity of labor supplied to decrease. Economists refer to a supply curve with this shape as
a backward-bending supply curve. It is important to keep in mind that this is an individual
supply curve. Where the bend occurs is an individual decision. For example, some entertain-
ers perform less as they get more famous. Others appear to keep increasing the quantity of
labor supplied as their wage rate increases.

264

Section 12.2The Market for Labor With Perfect Competition

The market supply curve of labor is the aggregate of all the individual supply curves. It shows
how much labor is available at different wage rates. Figure 12.4 shows a perfectly competitive
labor market. This market supply curve is not backward bending, because more workers will
enter the market at higher wage rates, and different individuals have different opportunity
costs and will make choices resulting in different substitution effects and income effects. In
other words, higher wages are needed to attract additional workers who have higher oppor-
tunity costs.

Figure 12.4: Perfectly competitive labor market

In a perfectly competitive labor market, the firm faces a perfectly elastic supply curve (Sf). If the supply
curve is perfectly elastic, the marginal resource cost (MRCL) curve is also perfectly elastic. The firm can
purchase as much labor as it wants at the market-determined wage rate.

0 Quantity/
time period

Quantity/
time period

Price,
cost

(a) Firm (b) Market

W* W*

x
1

S
L

MRP
L

D
L

Perfect competition in the labor market means the firm can purchase labor at the market
wage without affecting that wage. In this sense the firm is a wage taker, just like the perfectly
competitive firm was a price taker in the product market. The equilibrium wage rate is W* in
Figure 12.4. The firm can purchase as much labor as it wants at the wage rate W*.

Equilibrium in the Perfectly Competitive Labor Market
A profit-maximizing firm will employ additional labor until the cost of an additional unit is
equal to the benefit, which is when the marginal product of labor is equal to the equilibrium
wage (MRPL = W*). If a unit of labor adds more to revenue than to cost (if MRPL > W*), it will be
profitable for the firm to purchase more units of labor. However, if a unit of labor adds more
to cost than to revenue (if MRPL < W*), the firm should employ fewer units. The firm will hire laborers until the amount they add to total cost (W*) is exactly equal to the amount they add to revenue (MRPL). In Figure 12.4 the firm would employ x1 units of labor at wage rate W*. In terms of the numbers in Table 12.1, the firm would employ 4 units of labor if the market wage was $8 per unit. If the market wage was $4 per unit, 5 units of labor would be employed. 2019 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. 265 Section 12.3A Competitive Labor Market With a Monopolistic Product Market 12.3A Competitive Labor Market With a Monopolistic Product Market Now consider a farmer who has the sole rights to sell a highly specialized variety of corn; the farmer operates as a monopoly for this reason. The farms demand for labor is shown in Table 12.2. The difference between this case and the firm of the preceding section is that a monopo- list faces a downward-sloping demand curve. Thus, the product price (in the fourth column of Table 12.2) declines as the firm produces and sells more of its product. VMPL and MRPL are calculated in the same way as before. VMPL is the value of the labors marginal product, so VMPL = MPL P. MRPL is found by calculating the change in total revenue due to additional units of labor. For example, when the third worker is added, total revenue rises from $162 to $192. Thus, MRPL for the third worker is $192 $162 = $30. Note that VMPL is greater than MRPL for all but the first unit of labor, because in a monopoly, product price is greater than marginal revenue. Table 12.2: The demand for labor in a monopolistic product market Units of labor Total product Marginal product of labor (MPL) Product price Total revenue Value of marginal product of labor (VMPL) Marginal revenue product of labor (MRPL) 0 0 $0 $0 1 10 10 10 100 $100 $100 2 18 8 9 162 72 62 3 24 6 8 192 48 30 4 28 4 7 196 28 4 5 30 2 6 180 12 16 Both the VMPL curve and the MRPL curve are graphed in Figure 12.5 using the data from Table 12.2. The MRPL curve is the monopolists demand curve for labor. A monopoly firm, like the perfectly competitive firm, will employ labor until MRPL = W*. Although this firm operates as a monopoly when it sells the specialized corn, it is still purchasing labor in a competitive labor market. 2019 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. 266 Section 12.3A Competitive Labor Market With a Monopolistic Product Market The supply and demand curves for the monopolist in the competitive labor market are dia- grammed in Figure 12.6. The market demand curve for labor is, as usual, found by summing the MRPL curves for all firms purchasing this type of labor. The market supply curve (SL) is the sum of individual supply curves of workers. The market-determined wage is W. This firm can purchase as much labor as it desires at W, since the supply curve it faces, Sf, is perfectly elastic at W. Figure 12.5: The monopolists demand for labor When a firm has a monopoly power in the product market, the MRPL will lie below VMPL. This is because product price is greater than marginal revenue under monopoly. Thus, P MPL is greater than MR MPL. 0 Price, cost Quantity/ time period MRP L = D L VMP L Figure 12.6: A monopolistic firm facing a perfectly competitive labor market A firm with monopoly power, like a firm in a perfectly competitive market, can purchase as much labor as it wants at the market-determined wage rate. The difference is seen in (a), where the firm may choose to purchase fewer units than a perfectly competitive firm because MRPL < VMPL. 0 Quantity/ time period Quantity/ time period Price, cost 0 Price, cost (a) Firm (b) Market W* W* x 2 x 1 S L D L = MRP L VMP L MRP L = D L 2019 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. 267 Section 12.4Determinants of the Demand for Labor Again, the profit-maximizing firm equates the marginal benefit of labor (MRCL) to the mar-
ginal cost of labor (W*), so it hires x1 units of labor. Note from Figure 12.6 that the monopo-
list pays W*, the market wage. The fact that MRPL is less than VMPL does not mean that the
monopolist exploits labor by paying too little. The monopolist has to pay the market wage
just like any other employer in this market. Because MRPL is less than VMPL, the monopolist
does employ fewer workers than more competitive firms would employ. Recall from Chapter
11 that the monopolist restricts the quantity of output available to keep price high. The result
of this restriction of output in the resource market is that the monopolist uses fewer inputs
overall, including labor. If this were a competitive firm rather than a monopolist, the firm
would hire x2 workers.

12.4Determinants of the Demand for Labor
At the beginning of this chapter, you learned that the demand for labor has additional features
that make it somewhat different from the demand for a product. These features also influ-
ence the elasticity of the demand for labor, because they determine how the quantity of labor
demanded will respond to changes in the wage rate. In other words, the demand for labor
has a price elasticity, just as the demand for products does. This elasticity is influenced by the
distinguishing features of the demand for labor.

Share of Labor Input Costs
First, assume that only labor is used to produce the product sold by the firm, such as a food
delivery service. Labor costs in this case are close to 100% of product cost. If the price of
labor falls 10%, the cost of production falls 10%, and price (in perfect competition) falls 10%.
Now, more realistically, let labor costs constitute only 50% of product cost. Then if the price
of labor falls 10%, the cost of production falls only 5%. In other words, the larger the share of
labor cost in total production cost of a product, the more a change in the wage rate will affect
the cost of production and the price of the product. As a result, the larger the share of the total
cost of production that wages represent, the greater the elasticity of demand for labor will be.

Policy Focus: U.S. Immigration Policy

Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore,
Send these, the homeless, tempest-tossed to me,
I lift my lamp beside the golden door!

Inscription on the Statue of Liberty

The United States is a country of immigrants and descendants of immigrantsa melting
pot, as you may have heard in elementary school. In the early 19th century, Europeans,
mostly from western Europe, flooded into the United States. In the late 19th century, a wave

(continued)

268

Section 12.4Determinants of the Demand for Labor

of Chinese immigrated to California. In the early 20th century, a huge flood of immigrants
arrived from southern and eastern Europe. The most recent large waves of immigrants have
been from Southeast Asia, after the end of the Vietnam War, and from Central America.

Each influx of immigrants caused a great debate among Americans who were already
citizens. The issue was always the samewhether to shut the door to new immigrants.
Often the answer was yes, and new restrictions were passed. Many legal restrictions on
immigration are racist in origin. Many groups support immigration of those who are like
themselves but are opposed to altering the racial mix of the country.

There is at least one economic motive for restricting immigration. Immigration makes the
supply of labor more elastic for each skill level, putting downward pressure on wage rates.
It isnt surprising that organized labor groups are often opposed to liberalizing immigration.
In fact, some states even prohibit the transfer of certain occupational skills within the United
States. For example, an attorney in Wisconsin who plans to migrate to Oregon will not be
licensed until he or she passes the Oregon bar exam. This requirement clearly reduces the
supply of legal services in Oregon. As a result, attorneys in Oregon have higher incomes than
they would otherwise.

By 2018 nearly 34 million lawful immigrants were living in the United States. Many have
been granted permanent status (referred to as a green card) or have temporary visas as
students or workers. Another 1 million immigrants are unauthorized but have limited
permission to live and work in the United States. One of those programs is the Consideration
of Deferred Action for Childhood Arrivals (DACA). President Barack Obama created DACA
through a 2012 executive order. The program has allowed hundreds of thousands of young
people who were brought to the United States illegally as children to remain in the country.
Applicants cannot have serious criminal histories and must have arrived in the United States
before 2007, when they were under age 16. DACA recipients can live and work legally in the
United States for renewable 2-year periods.

As of 2017 roughly 800,000 so-called Dreamers have applied to join the initiative. On
September 5, 2017, President Donald Trump ended DACA by halting all new applications
for legal status through the program. Although the Justice Department allowed current
DACA recipients to apply for a 2-year renewal, all DACA authorizations will expire at the end
of the 2-year span, with the last authorization ending in March 2020 (U.S. Citizenship and
Immigration Services, 2018).

Trumps decision to end the program set off protests across the United States and was met
with a flurry of criticism from Democratic leaders, including former president Obama (2017),
who posted on Facebook:

To target these young people is wrongbecause they have done nothing
wrong. It is self-defeating because they want to start new businesses, staff
our labs, serve in our military, and otherwise contribute to the country we
love. And it is cruel. (para. 5)

Some experts have said the program could end up covering 1.3 million young people if it
were allowed to continue (Pew Research Center, 2018). How would these DACA recipients
impact the labor market in the United States? The effect would be negligible, since roughly
257 million people were employed in the labor market in 2018 (Bureau of Labor Statistics,
2018b). However, to the DACA recipients, it would make all the difference in the world.

Policy Focus: U.S. Immigration Policy (continued)

269

Section 12.4Determinants of the Demand for Labor

Opportunities for Input Substitution
For firms that produce physical goods, a great deal of substitution among the produc-
tive resources is possible. The choice of which combination of productive resources to use
depends, as you learned earlier, on the prices of those inputs. As the price of labor increases,
entrepreneurs will substitute capital and land for labor to the extent that such substitution
is feasible in the production function. For example, the automation of many services, such as
check-in kiosks at airports and hotels, can substitute capital for labor. Substitution can occur
for all the productive resources. Perhaps it is most visible in the substitution that takes place
among land, labor, and capital in urban versus rural areas. In urban areas, where land is expen-
sive, labor and capital are substituted for land. High-rise structures, which use much more
labor and capital, are built. In rural areas, low-rise office buildings and housing units are con-
structed. They use far less labor and capital than the high-rise structures of the central city.

Consider what happens when the wage rate falls. To the extent that labor can be substituted
for other inputs, more labor will be hired. The greater the degree of substitutability in pro-
duction, the greater will be the price elasticity of the demand for labor.

Economics in Action: Dreamers Defend DACA Program

The battle over the DACA program intensified in 2018. Lawyers for both sides argued before
the Ninth Circuit Court of Appeals in Pasadena, California. Watch the Trump administration
try to justify ending DACA while lawyers for the Dreamers make their case for why it should
stay: https://youtu.be/f TL_DwcLskw.

Economics in Action: The Rise of the Machines: Why
Automation Is Different This Time

Over the past decades, computers have substituted for a number of jobs, including the
functions of bookkeepers, cashiers, and telephone operators. A 2013 study found that about
47% of total U.S. employment is at risk of being replaced by computerization in the next
2 decades (Frey & Osborne, 2013). Automation itself is not new, so why is it different this
time? Watch the animated video here: https://youtu.be/WSKi8HfcxEk.

Shifts in the Demand for Labor
The demand curve for labor, like the demand curve for products, can shift in response to
changes in underlying conditions. Two of the most important causes of such shifts are changes
in demand for the product and changes in the employment of the other productive resources.

270

Section 12.5Productivity and Earnings Differences

Changes in the Demand for the Product
The demand for labor is derived from the demand for the product it is used to produce. Sup-
pose there is an increase in demand in the product market. The market demand curve will
shift to the right. This shift will cause the product price to increase for the competitive firm,
because the value of the marginal product of labor will be larger at all levels of production.

In a competitive labor market, each kind of firm will want to hire more labor at the existing
wage rate. The market demand for labor could increase, raising both the level of employment
and the wage rate. The amount by which the market wage increases will depend on how large
the industry is relative to the labor market. If the industry is small, there may be only a very
slight increase in wages. If it is large, however, the wage rate could rise significantly.

The Effect of Changes in Other Inputs
A second important cause of shifts in the demand for labor results from the fact that the
demands for different inputs are mutually interdependent. Suppose the firm doubles the
amount of its capitalfor example, when a popular restaurant opens a second location. If
labor and capital used together are complementary in the sense that an increase in capital
makes labor more productive, each unit of labor will have a larger product. Complementarity
is a fairly general phenomenon, especially for firms that increase the size of their operations.

Increased productivity resulting from an increased capital stock can have several effects. Con-
sider what happens if the capital stock expands in one firm but not the whole industry. The
firms demand curve (MRPL) would shift to the right in Figures 12.4 and 12.6 without any
(noticeable) effect on the market demand curve, because the firm is very small relative to the
industry. The result would be that the firm would employ m

Related Questions:

Related questions