So just like we saw shifts in the demand curve and the supply curve when we were talking about product markets and learning supply and demand, we see the same thing here. There can be shifts in the demand and supply for labor. Alright, so let's start with one of the shifts in demand and that is the change in the output price. Let's check it out. Okay, so the demand curve, right, it can shift left or right just like with goods. The first one we're going to talk about here is a change in the output price. So remember the output price, this is what we're selling our product for. So when we were talking about the production function, we were selling our pizzas for $5 but what if the price of the pizza changed, what if it went up or down? Well remember that our demand curve has to do with the marginal revenue product, right? The marginal revenue product is our demand curve. So remember that the marginal revenue product is price times MPL. This price, that is the output price. So if that output price changes, it's going to change our marginal revenue product and it's going to change our demand for labor, okay? So if the output price increases, well then our labor demand shifts to the right, okay? That's a good thing for us. The output price increases, there's a higher price, we can sell each pizza at a higher price, that's good. If the output price decreases, well it's going to shift our labor demand to the left, right? So we're not going to want to hire as many workers when there's a lower price. So let's go ahead and just look at an example here and see how this is going to affect the number of workers we hire.

This is that same example we've been dealing with where there's a pizza shop selling pizzas here and our original example when we studied the production function was an output price of $5, right, and we have a wage of 80 and that $80 wage is going to stay constant in both of our cases. Okay, so this was our original case where we had $5 per pizza and I've got it all filled out here. We discussed that we would end up hiring 4 workers right? We would hire these 4 workers because that's where our marginal revenue still exceeds our marginal cost, right? Once we hired that 5th worker, we had negative marginal profit for that 5th worker and we don't wanna hire them because we'll make less money. Cool? So we discussed that already, but now let's see what happens when we change the price.

Okay, so the price was $5 but now let's say the output price dropped to $2 per pizza. Okay, so from 5, now we're talking about 2, but the wage is the same, right? We still got an $80 wage. Now this isn't going to affect our marginal product of labor, right? The marginal product of labor, it's just how many workers do we have, it doesn't matter the output price or anything. We're going to have that same marginal product of labor based on the number of workers we hire, but the marginal revenue product, remember that does change because we're going to have the price times the MPL. So now instead of multiplying that MPL times 5, we have to multiply it by 2. So you're going to imagine that all our marginal revenue products are going to be lower than at the $5 price.

Alright, so let's start here. When we had 1 worker, our MPL was 30, so we're going to do $2 times 30, right? We're not doing $5 times 30, 2 times 30 that gives us a marginal revenue product of 60. How about 50? The next the second worker brings in 50 extra pizzas times $2 that's $100, right? 50 times the $2. The 3rd worker brings in 70 extra pizzas times $2. Well, our MRP 70 times 2, that's a $140 and then again 30 times 2 that's $60 here and the final worker bringing in 10 extra pizzas times the $2 well he's only going to bring in an extra $20 now. So notice how all these MRPs are lower than our example above, right? All the MRPs have come down because the price has come down. So you can imagine, remember we're setting that MRP equal to the wage. We want to find that profit maximizing quantity of workers where the MRP equals wage. So if this MRP is lower, we're getting closer to the wage sooner, right?

So let's see what happens here. The wage hasn't changed, right? And remember that that wage is still our marginal cost because all our other costs are fixed, right? There are no other costs here. We're just hiring an extra worker each time. Okay? So when we have 1 worker, well, we gotta pay him $80. The second worker also gets $80 and it's just $80 all the way down here, right? We're not adding the cost of all of the workers each time because it's the marginal cost. We already had 1 worker, we were paying $80 now we're gonna get a second worker, we got to pay an extra 80, not the total amount, okay?

So let's go ahead and calculate our marginal profit in each case and that's going to be this MRP minus that marginal cost, minus the wage, right? I'm going to put wage there. MRP minus the wage, okay? So let's go ahead and do this. 60 minus 80. Well, you're seeing already. Look at this. This is a negative profit here on the first unit, but how about the second or not unit, 1st worker. 2nd worker, well he brings in a $100 minus the 80 of his wage. Well, this one has a positive 20, right? A $100 marginal revenue product minus $80 wage gives us 20. The next one, 140 minus 80. Well here it's still going up. Now we're getting 60. Cool. How about that 4th worker? Remember, last time we wanted to hire the 4th worker, right? Because he was still bringing us money, But now check it out, the marginal revenue product of the 4th worker is only 60 and we gotta pay him 80. So this is going to be negative 20 in this case right? We're losing money on the 4th worker now because of the lower price. Last but not least, 20 minus 80 right? This last worker we weren't even hiring him before so you can imagine we're not gonna hire him now when we're making even less money off him. 20 minus 80 that's negative 60. So notice what happens here. You might first instinct be hey, we lose money on the 1st worker, it's negative 20 off the bat, we don't hire anybody. But that's wrong, right? Because we do start making money on the second and third worker. If you were going to look at total profit, we would have total profit when we had the third worker, right? The first worker has negative 20, the second worker has 20 so they offset. It's like with 2 workers we are breaking even, but that third worker does make us 60 more bucks. Bucks. So we come out on top with 3 workers here, right? We don't want that 4th worker because we start losing money again. So we're going to stop right here at 3 workers. So what has happened? The output price decreased, it decreased our marginal revenue product and thus we've hired fewer workers here. Alright? So that's how the output price can affect the demand for labor here.

Alright? So let's go ahead and move on to the next video.