A firm facing a market wage W₁ and having a short-run demand for labor given by MRP_L1 initially hires labor quantity l₁ (point a). The short-run effect of a permanent drop in the market equilibrium wage from W₁ to W₂ will cause the firm to hire more labor until MRP_L1 equals W₂. This is labor quantity l₂ (point b). In the long run, the increase in labor hired to l₂ raises the firm’s marginal product of capital, which leads the firm to purchase more capital and, in turn, raises the firm’s marginal revenue product of labor. This shifts out the firm’s short-run labor demand curve to MRP_L2, and the firm hires additional labor until W₂ = MRP_L2. This is labor quantity l₃ (point c). The long-run labor demand curve, I^D, runs through points a and c.