Labor and other input markets are governed by the forces of supply and demand. As is true for all goods and services, demand curves for productive inputs are downward sloping. The demand for all inputs is derived from their ability to produce output, revenues, and profits. Recall that the economic productivity of an input is determined by its marginal revenue product, or the additional net revenue generated by the last unit employed.For simplicity, consider the case of a law firm where labor is the sole input employed. If an additional lawyer could generate 1,000 billable hours per year, the MPL = 1,000 hours . If the billing rate was $250 per hour, MRQ = $250 and MRPL = $250,000 per year. In this case, the highest salary the firm could pay to employ such an attorney is $250,000 per year.In a very real sense, neither the law firm nor any employer determines the rate of pay. Customers determine wage levels through their willingness to pay for the goods and services firms provide. If customers increase their demand for legal services, the pay for lawyers increases. If customers decrease their demand for legal services, the pay for lawyers decreases. Some might tell me that I should be ashamed to admit that I have never hired a lawyer to close any business transaction that I've been involved with, even transactions that involved substantial business interests. Instead, I restrict my dealings to simple transactions with honorable counter parties. I know, I know. I should instead be hiring lawyers at every turn so as to help their employment situation. Similarly, I should use a telephone operator to give me those phone numbers I can never seem to remember. Instead, I look up the number and save 50 cents. Truthfully, I stopped using directory assistance when they began charging for it. Similarly, I pump my own gas, carry my own groceries, and fill my own drink cup at Burger King.Some might tell me that I also should be ashamed to admit that my favorite place to shop is Wal-Mart. That's where I get my Gillette razors, Tide laundry detergent, Mennen deodorant, and tons of other household items at bargain-basement prices. Don't tell anyone that I never buy clothes at Wal-Mart. Those I get from eddiebauer.com–on sale. When I get the chance, I also fly Southwest Airlines. I love low airline ticket prices, and I love to avoid ticket lines by using their check-in kiosks. Gosh, I've never paid to fly first class.Some might tell me that I should also blame Wal-Mart, the largest private employer in the world, when my friends talk about feeling guilty about the plight of those less educated, less talented or less hard working than they are. You might think I've got nothing bad to say about Wal-Mart because I like the fact that they provide millions of entry-level jobs –a first step on the economic ladder. You might think I've got nothing bad to say about Wal-Mart because I know that they have provided thousands of managerial opportunities to women and other minorities. You might think I've got nothing bad to say about Wal-Mart because I look at their efficient response to Hurricane Katrina, and thank God they are not based in Washington, DC.However, I know the truth. Buffett told me. Not Warren Buffett, the philosopher Jimmy Buffett.It's my own damn fault. I'm too cheap. I'm too cheap to hire lawyers that I don't need, shop at Nordstrom's, or fly “full service” airlines.God, I'm a mess.Mark
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