Factor market labor market ppt

There a two situations we are going to analyze Labor Markets:

1. Perfect Competition for a Good AND for the Labor to produce that good.

2. Imperfect Competition for a Good AND for the Labor to produce that good

We are going to look at Number 1 in this lesson.

“Perfectly Competitive Market for (1) the Product and (2) Labor

In a Perfectly Competitive Market for a Good the Price the firm receives is Constant 1. It can SELL all it produces for that constant price

2. The price is set in the Market for the good and the firm is a Price-Taker3. The DEMAND for its good is Perfectly Elastic (horizontal)—the Firm can sell as

much as it can at the Market Price.

In a Perfectly Competitive Market for Labor the Price the Firm PAYS for Labor is Constant 1. It can HIRE (“buy”) all the workers it needs at a Constant Wage 2. The wage is set in the Market for Labor and the firm is a Wage-Taker

a. Think Fast Food workers.3. The SUPPLY of labor is Perfectly Elastic (horizontal)—the Labor market SUPPLIES

all the workers the firm needs at the Market Wage

Labor is an INPUT that goes into the Production of an OUTPUT. Labor is a function/Factor of Production.

The DEMAND for an input like Labor is dependent on the DEMAND FOR THE OUTPUT (good/service)

So, the Demand for a factor like labor is called DERIVED DEMAND.

“Perfectly Competitive Market for (1) the Product and (2) Labor

(Table from Welkernomics)

Vocabulary:1. Quantity of Labor (L)---the number of workers a firm could hire2. Total Product (TP)---How much ALL workers contribute to Production3. Marginal Product of Labor( MPL)---How much EACH worker contributes to the running total4. Price of the Product (P)---In a Perfectly Competitive Market the Firm is a PRICE TAKER—Price Constant!5. Marginal REVENUE Product of Labor (MRPL)---The dollar value of EACH WORKER Marginal Product. MPL X P = MPL Marginal Revenue Product of Labor (MRPL) is the same of Value Marginal Product of Labor (VMPL)

Firm LaborMRPL

(W)

Quantity of Labor

$12

$10

$8

$6

$4

$2

$0

$-21 2 3 4 5 6 7 8


And so it begins…We first want to plot ourMRPL values. These values ALSO representPotential wages (“W”) an employer MIGHT be Willing to pay a worker based on their PRODUCTIVITY andThe PRICE OF THE GOOD (more on that later)

Firm Labor

Quantity of Labor

$12

$10

$8

$6

$4

$2

$0

$-21 2 3 4 5 6 7 8


MRPL

(W)

Firm Labor

Quantity of Labor

$12

$10

$8

$6

$4

$2

$0

$-21 2 3 4 5 6 7 8

D* for Labor “D L”

Our DEMAND CURVE for LaborDetermined by the MRPL for each worker


MRPL

(W)

Firm Labor

Quantity of Labor

$12

$10

$8

$6

$4

$2

$0

$-21 2 3 4 5 6 7 8


Getting a little ahead of myself, but if the Wage Rate (determined in the Market for Labor—we will get to that) is $6.00 per hour, HOW MANY WORKERS WILL IT HIRE? (hint: look at the Marginal Revenue Product of Labor column)


MRPL

(W)

Firm LaborMRPL

Quantity of Labor

$12

$10

$8

$6

$4

$2

$0

$-21 2 3 4 5 6 7 8


It will hire 6 workers…WHY?

The Profit Maximization Rule of Resource Employment

Marginal Resource Cost (MRC, aka Wage (w) = Marginal Revenue Product of Labor (MRPL)

MRC (w) = MRPL


Firm Labor

Quantity of Labor

$12

$10

$8

$6

$4

$2

$0

$-21 2 3 4 5 6 7 8



It won’t want to pay $6.00 per hour to the 5th Worker, because that worker only contributes$4.00 to Revenues. He/She costs more than he/shebrings in!

NO!!!

MRPL

(W)

“A”

Firm Labor

Quantity of Labor

$12

$10

$8

$6

$4

$2

$0

$-21 2 3 4 5 6 7 8



You WANT to hire workers 1,2, and 3 FOR SURE Because each of them produces revenue GREATERthan what the Firm pays them.

The Firm hires that 4th Worker because it will MaximizeProfits even though you pay him = to what he brings in.

HIRE UNTIL:

MRC (W) = MRPL

YES!!

MRPL

(W)

“A”

Market for LaborWage

(w)

Quantity of LaborQL*

W* ($6.00

DL*

SL*

Assumption: the Firm is hiring in a “Perfectly Competitive Labor Market”. The firmCan HIRE as many workers as it wants at the Wage Rate Set in the Market (graph on RIGHT).

In other words the market SUPPLIES workers to the firm at a rate of $6.00 per hour.

IMPORTANT POINT: The LABOR SUPPLY CURVE for the FIRM is Horizontal at the Market set Wage Rate---The firm SUPPLY CURVE is PERFECTLY ELASTIC!!

“A”


(w)


W* ($6.00

DL*

SL*

Assumption: the Firm is hiring in a “Perfectly Competitive Labor Market”. The firmCan HIRE as many workers as it wants at the Wage Rate Set in the Market (graph on RIGHT).

In other words the market SUPPLIES workers to the firm at a rate of $6.00 per hour.

IMPORTANT POINT: The LABOR SUPPLY CURVE for the FIRM is Horizontal at the Market set Wage Rate---The firm SUPPLY CURVE is PERFECTLY ELASTIC!!

FIRM LABOR SUPPLY CURVE

“A”


(w)


W* ($6.00

DL*

SL*

FIRM LABOR SUPPLY CURVE

GOT THAT!!!! Ok, I will assume you do. Now…We want to divide and conquer.

Let’s isolate the Firm Labor Graph and look at what SHIFTS the Demand/MRPL Curve

Oh, you thought it was going to be easy???

SL*

Focus only on the D*=MRPL* curve. The Marginal Revenue Product of Labor was Calculated by taking Marginal Product (MP) and multiplying it by Price (P). Right?

So, MRPL can change IF: Marginal Product (MP) changes and/or Price (P) changes.

“A”

SL*

Let’s start with a change in Marginal Product (MP) and keep it simple. What allows a Worker to be MORE productive now and in the future?

1. Education/Training/Skills/Processes (efficiencies)2. Technology/Capital Equipment.

“A”

SL*

So, anything that allows a worker to produce MORE than they did before will INCREASETheir MARGINAL PRODUCT.

***All else equal and the Price of the good does not change then an increase in MP will INCREASE Marginal Revenue Product of Labor (MRPL)***

“A”

Assume the Firm employs additional Capital, provides training to workers, orin some other way increases the efficiency level to produce.

Assume this allows EACH worker to produce an additional 2 Units of the good each hour.

See the chart above as I add to more units to the Marginal Product, thenChange the Marginal Revenue Product of Labor for each worker.

PRICE X MARGINAL PRODUCT = MARGINAL REVENUE PRODUCT OF LABOR

87654321

$16$14$12$10$8$6$4$2

SL*

$16

PLOT THESEPOINTS to getA NEW MRPL

Curve

“A”

SL*

$16

Connect these PointsFor form a NEW MRPL curve

“A”

SL*

$16

D1 = MRPL1

Notice we are at a NEW equilibrium, Point “B”. The wage DID NOT CHANGE but the number of workers the firm can hire at $6.00 per hour has INCREASED to 6!

“B”“A”

SL*

$16

D1 = MRPL1

***When PRODUCTIVITY INCREASES the MRP of Labor Curve shifts to the RIGHT and the firm can hire more workers.

“B”“A”

SL*

$16Ok, let’s start over and change the Price. Assume the Price the Perfectly Competitive Firm receives for the Good INCREASES to $3.00.

“A”

$3$3$3$3$3$3

$3$3

SL*

$16Now re-calculate MRP of Labor by taking MP X New Price.

“A”

$3$3$3$3$3$3

$3$3 $18

$15$12$9$6$3$0

-$3

SL*

$16

D1 = MRPL1

If we plot these MRP of Labor points we get a new MRPL curve that lies to the RIGHT of the old one and the NEW equilibrium point is “B” at 5 workers.

“B”“A”

$3$3$3$3$3$3

$3$3 $18

$15$12$9$6$3$0

-$3

Bottom Line on Shifting the MRP of Labor Curve

• An increase in Productivity will Shift it to the RIGHT allowing the firm to hire MORE workers.

• An increase in the Price will shift it to the RIGHT allowing the firm to hire MORE workers.

• A decrease in Productivity will Shift it to the LEFT and FEWER workers will be hired

• A decrease in the Price will Shift it to the LEFT and FEWER workers will be hired.

What happens when there is a change in the MARKET WAGE??

• In the Market for Labor things can change to either affect the Demand for Labor and/or the Supply of Labor.

• Let’s look at how the Firm responds to changes in the Wage that they have NO control over (ceterus paribus assumption)


(w)


W* ($6.00

DL*

SL*

Look at the Market for Labor graph on the RIGHT. There are TWO things that could cause the WageRate to INCREASE.

1. An INCREASE in DEMAND for Labor shifting the Demand curve to the RIGHT2. A DECREASE in SUPPLY of Labor shifting the Supply curve to the LEFT

“A” “A”


(w)


W* ($6.00

DL*

SL*

Let’s shift the Demand Curve to the RIGHT suggesting there is an INCREASE in Demand for Labor in This market.

The NEW MARKET WAGE IS $10.00

“A”

DL 1

QL 1

W1 ($10)“B”


(w)


W* ($6.00

DL*

SL*

Because the Firm is a Wage Taker, the Firm Supply Curve for Labor SHIFTS UP!

“A”

DL 1

QL 1

W1 ($10)

“A”

“B”


(w)


W* ($6.00

DL*

SL*

Now, the Firm has to look at how this new wage matches up with its own Labor Demand curve---D* = MRPL*

Remember the Profit Maximizing Quantity of Labor:MRC (W) = MRPL

The firm now finds that only 2 workers will be necessary.

“A”

DL 1

QL 1

W1 ($10)“B” “B”

“A”


(w)


W* ($6.00

DL*

SL*

Now, look at how the firm responds if there is a DECREASE in the Market Wage.

This could happen if:1. Demand for Labor DECREASES2. Supply of Labor INCREASES

“A” “A”


(w)


W* ($6.00

DL*

SL*

Let’s shift the Demand Curve to the LEFT suggesting there is an DECREASE in Demand for Labor in This market.

The NEW MARKET WAGE IS $4.00

“A”

DL 1

QL 1

W1 ($4.00)“B”


(w)


W* ($6.00

DL*

SL*

The Firm is a Wage Taker so the new Firm Supply Curve will shift DOWN.

There is a new equilibrium in on the FIRM graph where:

MRC ($4.00/hour) = MRPL ($4.00)

The firm will INCREASE hiring to 5 Workers

“A”

DL 1

QL 1

W1 ($4.00)“B”

“B”

Bottom Line

• If the firm is hiring in a Perfectly Competitive Labor Market:• It will hire more workers if the wage decreases• It will hire fewer workers if the wage increases

CETERUS PARIBUS!!If wage rate increases, as in a higher minimum wage this can be offset by what we learned prior to this:If those workers become MORE productive and/or the Price of the good they produce INCREASES.

This is an important part of the debate about increasing the Minimum Wage.

Factor market labor market ppt

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Transcript of Factor market labor market ppt