Output Price Rises, So Does Labor Demand

Output Price Rises, So Does Labor Demand, step by step

1. 1

   Start in Equilibrium

   The competitive labor market begins in equilibrium where labor demand (DL = MRP) crosses labor supply (SL). The wage and the quantity of workers hired are set at that intersection.

2. 2

   Output Price Increases

   The price of the good these workers produce rises. Labor demand is a derived demand, so it depends on the value the workers create, which is marginal product times output price (the marginal revenue product).

3. 3

   Labor Demand Shifts Right

   Because each worker now generates more revenue, the MRP of labor increases at every employment level, shifting labor demand rightward. Firms are willing to hire more workers at any given wage.

4. 4

   New Equilibrium: Higher Wage and Employment

   At the new intersection of the shifted demand with unchanged supply, the equilibrium wage is higher and more workers are employed. This is the derived-demand link from product markets to factor markets.

Where it ends up

A rise in the output price raises the marginal revenue product of labor, shifting labor demand right, so the market wage and the quantity of workers employed both rise.

Now draw it yourself

Same graph, graded on whether you move the right curve and leave the rest alone.

• Apple Harvest Wages →
• Frostvale Immigration Reform →
• Coal Country Wages →

More Labor Market walkthroughs

• More Workers Enter, Wage Falls →