That is, the firm's demand for an input is derived from consumers' demand for the product produced by that input. It seems simple to accept this at first. However, many workers ignore this fundamental reality when firms offer little or no pay increases, or, worse, announce layoffs, due to declining demand for their product. The firm hires a small amount of the total input available on the market. The firm pays the price for inputs that is set by the market.
Capital is priced at r dollars per units, and L at w dollars per unit.
Remember, the demand for labor is derived from the demand for the product produced by that labor. You will also recall that the firm is in the production business to make an economic profit. So the benefit to the firm from hiring labor comes from the addition to its revenue from hiring an additional worker . Let me explain why this makes sense intuitively. The firm isn't really interested in the worker per se but in the additional output produced by each additional worker.