Demand for Labor

Comparison to Theory of the Firm

The Theory of the Firm derives the supply of a good from a U-shaped average cost curve for a price taker. This model studies the choice of the optimal quantity of production. The demand for labor follows from a corresponding analysis of the optimal quantity of labor to employ given a capital stock that is fixed in the short run.

∏ = P·f(K,N) - W·N - R·K

Maximize over Y.

Profit Maximizing

MPN =W/P

Views

The Classical View

Demand for labor from profit maximizing behavior.

The New Classical (Real Business Cycles) View

Straight into indifference curves.

The Keynesian View

We are not operating on the production function.

The New Keynesian View

Demand for labor from profit maximizing behavior, but still get sticky wages and prices.

Link: Contents Production Function