Question

What determines the demand for labor for a firm operating in a perfectly competitive output market?

Short answer

The value of the marginal productivity of labor determines the demand for labor for a firm operating in a perfectly competitive output market.

Step-by-step solution

Concept Introduction

Perfect Competition is a market with a significant number of customers and sellers who deal in similar products. Firms can freely enter and exit at any time.

Explanation

The call for work in a perfectly competitive output marketplace is determined by means of the value of the marginal output of a worker. The subsequent method can be used for its calculation:

${\mathrm{VMP}}_{\mathrm{L}}={\mathrm{MP}}_{\mathrm{L}}\times \mathrm{P}$

Where,

${\mathrm{VMP}}_{\mathrm{L}}$= value of Marginal product

$M{P}_L$= Marginal Product of Labor

$\mathrm{P}$= Price of the product

When an additional labor unit is employed, the marginal product of labor is the net increase to the total product.

${\mathrm{MP}}_{\mathrm{L}}={\mathrm{TP}}_{\mathrm{n}}-{\mathrm{TP}}_{\mathrm{n}-1}$

Where,

${\mathrm{MP}}_{\mathrm{L}}$= Marginal Product of Labor

$\mathrm{TP}$= Total Product

Final answer

For a firm operating in a perfectly competitive output market, the value of marginal productivity of labor determines labor demand.