Microeconomics for MBAs 50. The Economic Way of Thinking for Managers. Microeconomics for MBAs develops the economic way of thinking through problems that MBA students will find relevant to their career goals. Maths is kept simple and the theory is illustrated with real-life scenarios | Chapter 15 Competitive and Monopsonistic Labor Markets 2 for his or her efforts. In a competitive market the price or wage rate of labor is determined just as other prices are by the interaction of supply and demand. To understand why a person earns what he does then we must first consider the determinants of the demand and supply of labor. The Demand for Labor The demand for labor is the assumed inverse relationship between the real wage rate and the quantity of labor employed during a given period everything else held constant. The demand curve for labor generally slopes downward. At higher wage rates employers will hire fewer workers than at lower wage rates. The demand for labor is derived partly from the demand for the product produced. If there were no demand for mousetraps there would be no need no demand for mousetrap makers. This general principle applies to all kinds of labor in an open market. Plumbers textile workers and writers can earn a living because there is a demand for the products and services they offer. The greater the demand for the products and the greater the demand for the labor needed to produce it -- and the greater the demand for a given kind of labor everything else held equal the higher the wage rate. The productivity of labor -- that is the quantity of work a laborer can produce in a given unit of time is another critically important determinant of the demand for labor. The price of the final product puts a value on a laborer s output but her productivity determines how much she can produce. Together labor productivity and the market price of what is produced determine the market value of labor to employers and ultimately the employers demand for labor. We can predict that the demand for labor will rise and fall with increases and decreases in both productivity and product price. Suppose for example that mousetraps are sold in a competitive market where their price is set by the interaction of supply and demand. Assume also that .
