when producing goods and services businesses require labor and capital as inputs to their production process the demand for labor is an economics principle derived from the demand for a firm s output that is if demand for a firm s output increases the firm will demand more labor thus hiring more staff and if demand for the firm s output of goods and services decreases in turn it will require less labor and its demand for labor will fall and less staff will be retained 
labor market factors drive the supply and demand for labor those seeking employment will supply their labor in exchange for wages businesses demanding labor from workers will pay for their time and skills breaking down demand for labordemand for labor is a concept that describes the amount of demand for labor that an economy or firm is willing to employ at a given point in time this demand may not necessarily be in long run equilibrium it is determined by the real wage firms are willing to pay for this labor and the number of workers willing to supply labor at that wage a profit maximizing entity will command additional units of labor according to the marginal decision rule if the extra output that is produced by hiring one more unit of labor adds more to total revenue than it adds to the total cost the firm will increase profit by increasing its use of labor it will continue to hire more and more labor up to the point that the extra revenue generated by the additional labor no longer exceeds the extra cost of the labor this relationship is also called the marginal product of labor mpl in the economics community other considerations in demand for laboraccording to the law of diminishing marginal returns by definition in most sectors eventually the mpl will decrease based on this law as units of one input are added with all other inputs held constant a point will be reached where the resulting additions to output will begin to decrease that is marginal product will decline another consideration is the marginal revenue product of labor mrpl which is the change in revenue that results from employing an additional unit of labor holding all other inputs constant this can be used to determine the optimal number of workers to employ at a given market wage rate according to economic theory profit maximizing firms will hire workers up to the point where the marginal revenue product is equal to the wage rate because it is not efficient for a firm to pay its workers more than it will earn in revenues from their labor common reasons for a shift in labor demand