A perfectly competitive firm’s demand curve for labour slopes downward. This follows from which law studied under production?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Law of diminishing marginal product
A firm hires labour up to where the wage equals VMPL. A higher wage needs a higher VMPL, so with the price fixed, the marginal product of labour (MPL) must rise. Under the law of diminishing marginal product, that happens only when less labour is used.
Option (1) Law of demand — Incorrect. The law of demand is about how much consumers buy of a good as its price changes.
Option (2) Law of diminishing marginal product — Correct. MPL falls as more labour is used, so the firm demands less labour at a higher wage.
Option (3) Increasing returns to scale — Incorrect. Returns to scale describe what happens when all inputs rise in the same proportion. Here only labour changes.
Option (4) Decreasing returns to scale — Incorrect. This too is about a proportional rise in all inputs.
This question uses Production and Costs and Market Equilibrium together.
NCERT (2026-27): “Wage Determination in Labour Market … Given the assumption of the law of diminishing marginal product, the fact that the firm always produces at w = VMPL implies that the demand curve for labour is downward sloping. To explain why it is so, let us assume at some wage rate w1, demand for labour is l1. Now, suppose the wage rate increases to w2. To maintain the wage-VMPL equality, VMPL should also increase. The price of the commodity remaining constantb, this is possible only if MPL increases which in turn implies that less labour should be employed owing to the diminishing marginal productivity of labour.” Introductory Microeconomics, Chapter 3 (Production and Costs): “3.4 The Law of Diminishing Marginal Product and the Law of Variable Proportions … Let us examine what is happening to TP. Notice that TP increases as labour input increases. But the rate at which it increases is not constant. An increase in labour from 1 to 2 increases TP by 10 units. An increase in labour from 2 to 3 increases TP by 12. The rate at which TP increases, as explained above, is shown by the MP. Notice that the MP first increases (upto 3 units of labour) and then begins to fall. This tendency of the MP to first increase and then fall is called the law of variable proportions or the law of diminishing marginal product. Law of variable proportions say that the marginal product of a factor input initially rises with its employment level. But after reaching a certain level of employment, it starts falling.” |