ABSTRACT
The preceding chapter undertook to examine the employment decisions of firms that are “price takers” in their commodity and labor markets. Using the principle of diminishing marginal productivity, it was established that under these conditions the demand curve for labor by the firm and by the industry is downward-sloping; that is, there is a negative relationship between the wage rate and the volume of employment offered by price-taking industries and the firms of which they are composed. Firms that are price takers in their commodity markets and for which labor is their principle input, which they vary depending on product demands, generate a typically downward-sloping demand curve that reflects the diminishing marginal productivity of their labor inputs. The prevailing wage rate is typically set by institutional forces, in particular the legal minimum or custom. Firms that are price takers in their commodity markets are typically also price takers in their labor markets. Their practice is to hire whatever quantities of labor they conceive to be consistent with their goal of maximizing profits at prevailing wage rates.
