Chapter 5-1 Chapter Five Demand for Labour in Competitive Labour Markets.
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Transcript of Chapter 5-1 Chapter Five Demand for Labour in Competitive Labour Markets.
Chapter 5-3
Demand for LabourFactors of production
inputs into the production of final goodsLinked to the firms demand for
goods/servicesDerived demand
Chapter 5-4
Employment DecisionsShort-run – one or more factors of
production cannot be varied (e.g., k)Long-run – firm can adjust all of its
inputs (N and K)State of technical knowledge is
assumed to be fixed
Chapter 5-5
Demand for LabourThe quantity of labour services the firm
would employ at each wage: N=N(w)Depends on the firms objectives and
constraintsObjective is to maximize profits
Chapter 5-6
Firm’s ConstraintsDemand for product (output)Supply of labour (and other factors of
production)Production function ( the maximum
output given the various combinations of inputs)
Fixed quantity of one or more factors of production (short run only)
Chapter 5-7
Theory of Labour DemandExamines the quantity of labour the firm
desires given the market-determined wage rate
Assume: The firm is a perfect competitor in the labour market.
Chapter 5-8
Market Behaviour A firm’s behaviour in the product market
affects demand for labour wage rate employment decisions
The structure of the labour market affects supply curve - amount of labour available to the firm at various wage rates
Chapter 5-9
Categorizing the Structure of Product Markets
Industry Structures perfect competition monopolistic oligopoly monopoly
decreasing degree ofcompetition
Chapter 5-10
Categorizing the Structure of Labour Markets Industry Structures
perfect competition monopsonistic competition oligopsony monopsony
decreasing degree ofcompetition
Chapter 5-11
Characteristics of Industry StructuresCategories are independent of each
other 16 possible combinations that affect
wage and employment outcomes
Chapter 5-13
Production FunctionFirms use factors of production (labour-
N, capital -K) to produce Q (quantity of a single output) Q=F(K,N)
In the short-run K is fixed so the production function is simply a function of N
Chapter 5-14
Profit-Maximization SituationCosts fall into two categories:
fixed variable
Decision Rule #1Operate as long as variable costs are
coveredTotal revenue exceeds total variable
costs
Chapter 5-15
Profit-Maximization
Decision Rule #2 Increase output until the additional cost
associated with the last unit produced equals the additional revenue associated with that unit
Marginal Costs equal Marginal Revenue, I.e., MC=MR
Chapter 5-16
Profit-Maximizing in Terms of Labour Demand
Terminology is modified: Total Revenue Product (TRP) - the total
revenue associated with the amount of an input employed
Marginal Revenue Product (MRP) - the change in total revenue associated with a change in the amount of input employed
Chapter 5-17
Profit-Maximizing Decisions in terms of Labour
Firm should: produce as long as the total revenue
product generated by the variable input exceeds the total costs associated with employing that input
expand employment of labour to the point at which its marginal revenue product equals marginal cost
Chapter 5-18
A Firm’s Short-Run Demand for Labour
In competitive markets: price taker can hire labour without affecting market wage marginal (and average) cost is market wage hire labour until the MRP equals the W short-run labour demand curve is it’s marginal
revenue product curve (for labour)
Chapter 5-19
Figure 5.1 Short-Run Demand for Labour
Labour ServicesN*0
Wag
e R
ate
ARPN
MRPN
N*1
W1Wages higher than W1 the firm would shut down
W0
Chapter 5-20
Short-Run Demand for LabourFirm will shut down
if average cost of labour (wage rate) exceeds the average revenue product of labour
Short-run labour demand curve MRPN curve below the point at which the average and
marginal product curves intersect
Chapter 5-21
Short-Run Labour Demand CurveDownward sloping because of
diminishing marginal returns to labour in wage rate will cause in demand for
labour (movement along the curve) in K will cause in demand for labour
(shift in demand curve) in p will cause in demand for labour
(shift in demand curve)
Chapter 5-22
Industry Structure
Perfectly Competitive Company price taker can sell output without
affecting market price MRQ=product price employs labour
services until the value of MP of labour just equals the wage
Monopoly firm is so large it
influences price when the monopolist
hires more labour to produce more output, both the marginal physical product of labour and the marginal revenue falls
Chapter 5-23
Perfectly Competitive FirmPerfectly Competitive Company
price taker sells output without affecting market price MRQ=product price Employs labour services until the value of
MP of labour just equals the wage
Chapter 5-24
Application: Proposals by Carter and Bentsen (1979)
Cartel: subsidize firms by x dollars per worker hired.
Bentsen: subsidy is given only if firms hire more workers than they did previously.
Conclusion: Bentsen’s proposal is better in terms of job creation (I.e., Nb>Nc)
Chapter 5-27
Isoquants “Equal quantity”Combinations of labour and capital used
to produce a given amount of a product (output)
Slope exhibits a diminishing marginal rate of technical substitution MRTS
Chapter 5-29
Isocost LineAll combinations of capital and labour
that can be bought for a given total costCM=rK+wN
Total Cost =(price of capital * K)+(wage rate*employees)
Chapter 5-32
A Firm’s Labour Demand
Obtained by varying the wage rate and tracing out the new equilibrium, profit
maximizing amounts of labour employed
Chapter 5-33
Figure 5.3 a Isocost Rotation from a Wage Increase
N
KKP=C1
r0
KM=C0
r0
0 NM=C0
w0
NP=C1
w1
Slope=-w0/r0
Slope=-w1/r0
E0
Q0K0
N0
Chapter 5-34
Figure 5.3 b Profit Maximizing Output and Derived Labour Demand
N
K
0 N0 NM
KM
Q0
E0
NN
KN
N1
E1
Q1
Chapter 5-36
Perfect Competition wage rotates isocost line downwards with a
greater slope The firm will maximize profit by moving to a
lower level of output wage also shifts up the firms’s marginal and
average cost curves In a perfect competitive industry each firm
reduces output raising the price of the product
Chapter 5-40
Figure 5.5 Substitution and Scale Effects of a Wage Change
N
K
0 NS N0 NM
KM
KN
Q0
E0
N1
E1
Q1
ES
Chapter 5-41
In TheoryDemand schedule is downward sloping
firm would substitute cheaper inputs for the more expensive labour
SUBSITUTION EFFECT Firm would reduce its scale of operations
because of the cost increase associated with the increase in wage
SCALE EFFECT
Chapter 5-42
Relationship Between the Short and Long Run Short-Run
amount of capital is fixed
no substitution effect
Long-Run firm has flexibility by
varying its capital stock
response to a wage change will be larger in the long run
Chapter 5-43
Elasticity of Demand for LabourDemand for labour decreases as wages
increase (negative function) Wage increases have an adverse effect
on employmentThe magnitude of the effect can be
seen by the elasticity of the derived demand for labour
Chapter 5-44
Elasticity of DemandMeasures the responsiveness of the
quantity of labour demanded to the wage rate
Equals the % change in the quantity of labour demanded divided by the % change in the wage rate
Chapter 5-47
Elasticity of Demand for LabourBasic determinants of the elasticity of
demand for labour: availability of substitute inputs supply of substitute inputs demand for output ratio of labour cost to total cost
Chapter 5-48
Elasticity of Demand If inputs can not be easily substituted
elasticity of labour demand If demand for output is not effected by a
price increase (due to cost of wage increase) demand for labour will be inelastic
Demand for labour will be inelastic if labour cost is small portion of total cost