Copyright © 2009 Pearson Education, Inc. Chapter 3 The Demand for Labor.
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Transcript of Copyright © 2009 Pearson Education, Inc. Chapter 3 The Demand for Labor.
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Copyright © 2009 Pearson Education, Inc.
Chapter 3
The Demand for Labor
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Profit Maximization
Output Approach: Increase output if the additional revenue > additional cost until MR=MC
Input Approach: Hire inputs if the additional revenue > additional cost until MRP=MEI
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Derived Demand Marginal Product (MP) Diminishing Marginal Returns Marginal Revenue (MR) Marginal Revenue Product (MRP) Marginal Expense of an Added Input
Important Definitions - Marginal Revenue Product
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Important Definitions - Marginal Revenue Product
MP = Change in Output/Change in Input
MR = Change in Revenue/Change in Output
MRP = Change in Revenue/Change in Input
MRP = MP x MR (general case)
MRP = MP x P (competitive product market)
MEI = Change in Total Cost/Change in Input
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Short-Run Demand for Labor
Assume:
1. Two inputs, capital and labor
2. Labor is variable and capital is Fixed
3. Both labor and final product marketsare competitive
4. MP of labor is diminishing
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Table 3.1: The Marginal Product of Labor in a Hypothetical Car Dealership
(capital held Constant)
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The Short-Run Labor Demand Curve
Based on the SR profit maximization criteria for hiring inputs, the labor demand curve for the firm can be represented by the MP curve or the MRP curve
If the labor and product markets are competitive, hire until:
MRP = MP x P = W (nominal wage) orMP = W/P (real wage)
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Figure 3.1: Demand for Labor in the Short Run (Real Wage)
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Table 3.2: Hypothetical Schedule of Marginal Revenue Productivity of
Labor for Store Detectives
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Figure 3.2: Demand for Labor in the Short Run (Money Wages)
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Long-Run Demand for Labor
Characteristics of Isoquants:
1. Although each isoquant represents a unique level of output,each point on an individual isoquant represents the same level of output
2. Isoquants have negative slopes
3. Isoquants are convex
4. The slope of an isoquant is called the Marginal Rate of Technical Substitution
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Figure 3A.1: A Production Function
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The Isoexpenditure Curve
Let: TE = wL + cK
w = wage, L = labor input, c = capital expense, K = capital inputand TE = Total expenditures on inputs
Then: K = TE/c - w/c x L
and the equation for isoexpenditure curve B is:
K = 1,500/20 - 10/20 x L
= 75 - .5L
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Figure 3A.3: Cost Minimization in the Production of Q*
(Wage = $10 per Hour; Price of a Unit of Capital = $20)
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Cost Is Minimized in the Long Run Where:
An isoexpenditure curve is tangent to an isoquant
MRTS = - MPL/MPk = - W/C orW/MPL = C/MPC, where
W = wage, MPL = marginal product of labor
C = capital expense, MPC = marginal product of capital
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Substitutes in Production Complements in Production Gross Substitutes Gross Complements
Important Definitions - Multiple Inputs
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Figure 3.3: Effect of Increase in the Price of One Input (k) on Demand for Another Input (j),
where Inputs Are Substitutes in Production
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When Product Markets Are Not Competitive, The Profit Maximization Condition Becomes :
MRP = MP x MR = W
Because MR < P, the labor demand curve of a price maker in the product market lies to the left of the labor demand curve of a price taker in the product market.
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Figure 3.4: The Market Demand Curve and Effects of an Employer-Financed
Payroll Tax
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Figure 3.5: Payroll Tax with a Vertical Supply Curve