To maximize profits, firms choose an optimal demand for factors of production and an optimal quantity of output. This EconModel application focuses on the profit maximizing demand for a factor of production, which in this case is labor.
Model Link:
The
Demand for Labor
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This analysis is closely related to the Average Cost / Marginal Cost analysis of the optimal quantity of output. Indeed, given that capital is taken as fixed, choosing the optimal demand for labor and choosing the optimal quantity of output both lead to the same optimal level of production.
The basic analysis for this application leads you through a sequence of steps from the point of view of demand for a factor of production:
- Draw Graphs of Production and Profits
- Maximize Profits Given a Wage Rate
- Derive the Labor Demand Curve
- Analyze Effects of Price Changes
- Analyze Effects of Technology Changes
A second sequence of steps shows the correspondence between the profit-maximizing labor demand curve and the average cost/marginal cost view of the profit-maximizing quantity of output.
Classic Economic Models
Microeconomics
Introduction
Overview of Micro Models
Supply and Demand
Basic Supply and Demand
Who Pays a Sales Tax?
The Cobweb Model and
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Theory of the Firm
Perfect Competition
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Price Discrimination
The Demand for Labor
Theory of the Consumer
Two Goods - Two Prices
Intertemporal Substitution
Labor Supply, Income Taxes,
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The Simple Keynesian Model
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