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14.1 • The Theory of Labor Markets 329

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Derived Demand
Economists describe the demand for inputs like labor as a derived demand. Since the demand for labor is MPL*P, it

is dependent on the demand for the product the firm is producing. We show this by the P term in the demand for

labor. An increase in demand for the firm’s product drives up the product’s price, which increases the firm’s demand

for labor. Thus, we derive the demand for labor from the demand for the firm’s output.

Demand for Labor in Imperfectly Competitive Output Markets

If the employer does not sell its output in a perfectly competitive industry, they face a downward sloping

demand curve for output, which means that in order to sell additional output the firm must lower its price.

This is true if the firm is a monopoly, but it’s also true if the firm is an oligopoly or monopolistically
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