LABOR DEMAND
PROBLEM –
How does an employer decide how many people to hire?
How does an employer decide how many people to hire?
Basic Market Assumptions: Firms want to maximize profits Firms use (only) Labor and capital. The only cost of hiring labor is the hourly wage Labor and product markets are competitive The firm is a price taker in both the Labor and
Output Markets Additional Assumption: Capital is Fixed
We are in the Short-RUN
How does an Employer Decide on the Number of Employees to
Hire?
Marginal Analysis - (Recall from Principles of Micro) MR=MC
where MR – Marginal Revenue and MC – Marginal Cost
A Stepwise Manner Hiring the First worker, second, etc, until
MR=MC
How does an Employer Decide on the Number of Employees to Hire?
Another Equivalent Method: Hire as long as MRP >=Wage Where MRP is the marginal value of additional
workers MRP = P*MPL where P is the output’s price So What Determines MPL:
Not Personal Characteristics MPL depends on Capital (K) and Technology
Diminishing Marginal Returns (Diminishing Marginal Productivity)
How does an Employer Decide on the Number of Employees to Hire? NOTICE: is defined as profits = TR - TC
Watch Repairs
L TP MPL MRP TR TC π MR MC
0 0 .1 4 4
2 10 6
3 15 5
4 18 3
5 20 2
6 19 -1
changemeanswhere
MPL
L
TP
How does an Employer Decide on the Number of Employees to Hire?
Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100.
Watch Repairs
L TP MPL MRP TR TC π MR MC
0 0 . .1 4 4 100
2 10 6 150
3 15 5 125
4 18 3 75
5 20 2 50
6 19 -1 -25
MRP = MPL * P
How does an Employer Decide on the Number of Employees to Hire?
Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100.
Watch Repairs
L TP MPL MRP TR TC π MR MC
0 0 . . 0
1 4 4 100 100
2 10 6 150 250
3 15 5 125 375
4 18 3 75 450
5 20 2 50 500
6 19 -1 -25 475
TR = TP * P
How does an Employer Decide on the Number of Employees to Hire?
Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100.
Watch Repairs
L TP MPL MRP TR TC π MR MC
0 0 . . 0 100
1 4 4 100 100 160
2 10 6 150 250 220
3 15 5 125 375 280
4 18 3 75 450 340
5 20 2 50 500 400
6 19 -1 -25 475 460
TC = TFC + TVC
Where
TVC = L * w
TFC
TVC
How does an Employer Decide on the Number of Employees to Hire?
Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100.
Watch Repairs
L TP MPL MRP TR TC π MR MC
0 100 -100
100 160 -60
250 220 30
375 280 95
450 340 110
500 400 100
475 460 15
π = TR – TC
Note that π is maximized when MRP = w or
MR = MC
How does an Employer Decide on the Number of Employees to Hire?
Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100.
Watch Repairs
L TP MPL MRP TR TC π MR MC
-100 - -
-60 25 15.00
30 25 10.00
95 25 12.00
110 25 20.00
100 25 30.00
15 25 -60.00
TP
TRMR
ΔTP
ΔTVCMC
constant is TFC sinceΔTP
ΔTCMC
How does an Employer Decide on the Number of Employees to Hire?
Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100.
Watch Repairs
L TP MPL MRP TR TC π MR MC
0 0 - - 0 100 -100 - -
1 4 4 100 100 160 -60 25 15.00
2 10 6 150 250 220 30 25 10.00
3 15 5 125 375 280 95 25 12.00
4 18 3 75 450 340 110 25 20.00
5 20 2 50 500 400 100 25 30.00
6 19 -1 -25 475 460 15 25 -60.00
Maximum
Profit at
Hiring 4
workers
What does an Employer do when the price of Labor Decreases?
Now Assume market wage is $40 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100.
Watch Repairs
L TP MPL MRP TR TC π MR MC
0 0 - - 0 100 -100 - -
1 4 4 100 100 140 -40 25 10.00
2 10 6 150 250 180 70 25 6.67
3 15 5 125 375 220 155 25 8.00
4 18 3 75 450 260 190 25 13.33
5 20 2 50 500 300 200 25 20.00
6 19 -1 -25 475 340 135 25 -40.00
Maximum
Profit at
Hiring 5
workers
What does an Employer do when the price of Labor Increases?
Now Assume market wage is $80 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100.
Watch Repairs
L TP MPL MRP TR TC π MR MC
0 0 - - 0 100 -100 - -
1 4 4 100 100 180 -80 25 20.00
2 10 6 150 250 260 -10 25 13.33
3 15 5 125 375 340 35 25 16.00
4 18 3 75 450 420 30 25 26.67
5 20 2 50 500 500 0 25 40.00
6 19 -1 -25 475 580 -105 25 -80.00
Maximum
Profit at
Hiring 3
workers
How does an Employer Decide on the Number of Employees to Hire?
Conclusion:
As Wages Decrease the Number of Workers Hired __________.As Wages Increase the Number of Workers Hired __________.
increases
decreases
How does an Employer Decide on the Number of Employees to Hire?
Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100.
Watch Repairs
L TP MPL MRP TR TC π MR MC
0 0 - - 0 100 -100 - -
1 4 4 100 100 160 -60 25 15.00
2 10 6 150 250 220 30 25 10.00
3 15 5 125 375 280 95 25 12.00
4 18 3 75 450 340 110 25 20.00
5 20 2 50 500 400 100 25 30.00
6 19 -1 -25 475 460 15 25 -60.00
Maximum
Profit at
Hiring 4
workers
What does an Employer do when the price of the Output Increases?
Now Assume market wage is $60 per day and the (average) cost of a watch repair is $33 and total fixed cost is $100.
Watch Repairs
L TP MPL MRP TR TC π MR MC
0 0 - - 0 100 -100 - -
1 4 4 132 132 160 -28 33 15.00
2 10 6 198 330 220 110 33 10.00
3 15 5 165 495 280 215 33 12.00
4 18 3 99 594 340 254 33 20.00
5 20 2 66 660 400 260 33 30.00
6 19 -1 -33 627 460 167 33 -60.00
Maximum
Profit at
Hiring 5
workers
What does an Employer do when the price of the Output Decreases?
Now Assume market wage is $60 per day and the (average) cost of a watch repair is $19 and total fixed cost is $100.
Watch Repairs
L TP MPL MRP TR TC π MR MC
0 0 - - 0 100 -100 - -
1 4 4 76 76 160 -84 19 15.00
2 10 6 114 190 220 -30 19 10.00
3 15 5 95 285 280 5 19 12.00
4 18 3 57 342 340 2 19 20.00
5 20 2 38 380 400 -20 19 30.00
6 19 -1 -19 361 460 -99 19 -60.00
Maximum
Profit at
Hiring 3
workers
How does an Employer Decide on the Number of Employees to Hire?
Conclusion:
As Price of Output Decrease the Number of Workers Hired __Decreases__. As Price of Output Increase the Number of Workers Hired __Increases__.
How does an Employer Decide on the Number of Employees to Hire?
Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100.
Watch Repairs
L TP MPL MRP TR TC π MR MC
0 0 - - 0 100 -100 - -
1 4 4 100 100 160 -60 25 15.00
2 10 6 150 250 220 30 25 10.00
3 15 5 125 375 280 95 25 12.00
4 18 3 75 450 340 110 25 20.00
5 20 2 50 500 400 100 25 30.00
6 19 -1 -25 475 460 15 25 -60.00
Maximum
Profit at
Hiring 4
workers
What does an Employer do when the Fixed Cost Decreases?
Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $80.
Watch Repairs
L TP MPL MRP TR TC π MR MC
0 0 - - 0 80 -80 - -
1 4 4 100 100 140 -40 25 15.00
2 10 6 150 250 200 50 25 10.00
3 15 5 125 375 260 115 25 12.00
4 18 3 75 450 320 130 25 20.00
5 20 2 50 500 380 120 25 30.00
6 19 -1 -25 475 440 35 25 -60.00
Maximum
Profit at
Hiring 4
workers
What does an Employer do when the Fixed Cost Increases?
Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $120.
Watch Repairs
L TP MPL MRP TR TC π MR MC
0 0 - - 0 120 -120 - -
1 4 4 100 100 180 -80 25 15.00
2 10 6 150 250 240 10 25 10.00
3 15 5 125 375 300 75 25 12.00
4 18 3 75 450 360 90 25 20.00
5 20 2 50 500 420 80 25 30.00
6 19 -1 -25 475 480 -5 25 -60.00
Maximum
Profit at
Hiring 4
workers
How does an Employer Decide on the Number of Employees to Hire?
Conclusion:
As Fixed Cost Decreases the Number of Workers Hired __Remains Unchanged__. As Fixed Cost Increasesthe Number of Workers Hired __Remains Unchanged__.