The following points highlight the four main factors determining the demand for labour. The factors are: 1. The Quantity used of the Cooperating Inputs 2. The Price of the Product 3. The Law of Diminishing MPL 4. The State of the Art or Technology.
Factor # 1. The Quantity used of the Cooperating Inputs:
We have seen that the greater the quantity of a cooperating input like capital, the greater would be the demand for labour.
This proposition follows from two things:
First, the product price is given as there is perfect competition in the product market. So the firm can sell an increased quantity at an unchanged price.
Second, the greater the quantity of the cooperating input(s), the greater would be the MPL at any L.
Factor # 2. The Price of the Product:
The greater the selling price of the product (P), the higher would be the MRPL = VMPL curve, given the MPL curve of the firm, and consequently, the higher would be the demand curve for labour. Therefore, the greater the P, the greater would be the demand for L at any particular W.
Factor # 3. The Law of Diminishing MPL:
Owing to the law of diminishing marginal product of labour, the greater the quantity of labour (L) the firm uses currently, the smaller would be the MPL and, therefore, smaller would be the MRPL = VMPPL, and consequently, the smaller would be the demand price of labour that the firm would offer at any L. This gives us that the firm may use more of labour only when its price falls.
Factor # 4. The State of the Art or Technology:
Demand for a variable productive service, like labour, depends on the state of the art or technology. If there is technological progress, the production function itself would shift. Now there would be a higher production at any particular combination of the variable inputs—all the variable inputs would become more productive.
Consequently, the marginal product curves of all the variable inputs would shift upward. Consequently, the MRPL = VMPPL curve and the labour demand curve of the firm would shift upwards. Now, at any particular W, demand for labour would be larger.