Demand For Labour & Importance Of Labour Supply

 Businesses require a supply of labour and capital for producing goods and services. The demand for labour is an economic principle that derives from the demand for a firm’s output. That means, an increase in the demand for the firm’s output, will require more labour and lead to more staffing. The supply and demand for labour are dependent on the labour market, and those seeking employment will receive wages in return for their labour. They are usually paid in the context of the time and skills applied.



What is Demand for Labour?

The demand for labour is a concept that describes the demand of an economy or firm towards employing labourers at a given time. This demand may not necessarily be for the long run, and is determined by the real wage firms are willing to pay for labour and the numbers of workers who choose to work at that given wage.

For a profit-maximizing entity, employing additional units of labour is ideal. If the extra output is produced by hiring an extra unit of labour, it adds more to the generated revenue than the total cost; hence, the firm will increase profits by increasing the units of labour. The company will keep hiring labourers in this case, until the extra revenue generated doesn’t exceed the extra cost of labour. 


Key terms

  • Marginal product: The extra output that is produced by an extra unit of labour.

  • Marginal revenue product: The change in total revenue earned by the company by implementing one extra unit of labour.

  • Capital: Existing goods that are available as a factor of production, like equipment and office buildings.

Kep points

  • Firms hire more labour when the marginal revenue product of labour exceeds the wage rate and stop hiring as the two values become equal.

  • A firm will shift spending on production variables as long as the marginal benefit of the shift exceeds the marginal costs.

  • The point at which the marginal revenue product of labour equals the prevailing wage rate is called labour market equilibrium.

  • If the additional benefits of labour exceed the marginal costs, it will be better for the firm to invest in labour instead of capital.


According to economic theory, firms will continue labour supply in UAE, up to the point where the marginal revenue product is equal to the wage rate because it is not optimum for companies to pay their workers more than they will earn in revenues from their labour.

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