Why Labor Demand Is Derived Demand

Labor demand is a derived demand: it exists only because demand for some output exists first. Nobody buys an hour of a worker's time for its own sake. A bakery hires another baker because people want more bread, not because the owner likes company. This means every shift in demand for a product shows up one step later as a shift in demand for the people who make it. When demand for typewriters dried up, demand for typewriter repair technicians dried up right along with it. The technicians didn't get worse at their jobs. The thing their labor produced value for simply stopped being wanted.

Trace the chain and it runs through price and marginal revenue product, MRP: the price of the output times the extra output a worker adds. Suppose the price of steel falls. Steel producers now earn less revenue per ton, so the marginal revenue product of a steelworker falls too, since MRP is marginal product times price. Firms respond by hiring fewer steelworkers at any given wage, shifting labor demand left. Run that same logic in reverse with a price increase and labor demand shifts right, because each worker is suddenly worth more to the firm in revenue terms.

This sets up the rest of factor markets. Once labor demand is understood as a curve built from MRP, the next step is seeing how firms pick the profit-maximizing quantity of labor by comparing MRP to the wage, hiring up to the point where they're equal.