Please recall how TP, MP and AP are plotted

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Transcription:

Please recall how TP, MP and AP are plotted

The Marginal Revenue Product (MRP) The increase in total revenue for every additional labor unit employed. Units of Labor TP MP Product Price TR MRP ( TR/ L) VMP (MP x P) 4 5 7 8 15 7 3 4 45 4 1 3 1 30 54 7 84 0 4 18 1 4 18 1 PERFECTLY COMPETITIVE MARKET MRP declines because of DIMINISHING MARGINAL PRODUCT

The Marginal Wage Cost (MWC) The increase in total wage cost resulting from the employment of one more labor unit. Units of Labor TP MP Product Price TR MRP ( TR/ L) VMP (MP x P) 4 5 7 8 15 7 3 4 45 4 1 3 1 RECALL: VMP = w ---------- the marginal gain from hiring an additional worker equals the cost of that hire VMP = MRP rule: MRP = MWC MWC = w Thus, the short run labor demand curve was derived from VMP and MRP curve 30 54 7 84 0 4 18 1 4 18 1

The Equality of VMP and MRP in Perfectly Competitive Markets Since in PC markets, price is constant, thus P = MR MRP (MR x MP) the extra revenue to the firm from employing an additional unit of labor = VMP (P x MP) the social value of the extra unit of output Units of Labor TP MP Product Price TR MRP ( TR/ L) VMP (MP x P) 4 5 7 8 15 7 3 4 45 4 1 3 1 30 54 7 84 0 4 18 1 4 18 1

Short Run Labor Demand: Imperfectly Competitive Markets Units of Labor TP MP Product Price TR MRP VMP 4 5 7 8 15 7 3 4 45 4 1 3 1.0.40.0.10.00 1.0 3.00 4.80 7.0 88.0 0.00 87.40 5.80 14.40.00 1.80 -.0 8.80 1.80 1.0.00 1.0 Has some degree of monopolistic/market power RECALL IN MICROECONOMICS: In IC markets, P is not equal to MR, thus, MR < P, thus, MRP < VMP MRP declines because of DIMINISHING MARGINAL PRODUCT and PRICE DECLINES AS OUTPUT INCREASES

Short Run Labor Demand: Imperfectly Competitive Markets Units of Labor TP MP Product Price TR MRP VMP 4 5 7 8 15 7 3 4 45 4 1 3 1.0.40.0.10.00 1.0 3.00 4.80 7.0 88.0 0.00 87.40 5.80 14.40.00 1.80 -.0 8.80 1.80 1.0.00 1.0 Notice the value of the added output from society s perspective. (VMP) But the MRP of the 5 th worker is only 5.80. Why is there a 3.00 difference? To sell the 1, There must be a 0.0 cut = 8.80 (15 x 0.0)

Plot the short run labor demand curve for the imperfectly competitive seller using the MRP = W rule IC firm restricts output in the market because it will be more profitable to produce less output, thus, will employ less workers. Therefore, IC firm will be less responsive to wage rate changes than a PC seller. NOTE: VMP is not equal to MRP thus, (MRP = MR x MP) < (VMP = P x MP)

Long Run Labor Demand q = f ( E, K) Schedule or curve indicating the amount of labor that firms employ at each possible wage rate when both labor and capital are variable

Output Effect or Scale Effect Change in employment resulting solely from the effect of a wage change on the employer s cost of production. Illustrate the effect of a decline in wage rate using Marginal Cost curve and Marginal Revenue curve of a PC firm.

Substitution Effect Change in the employment resulting solely from a change in the relative price of labor, output being held constant. A firm responds to a wage decline by substituting the relatively less expensive labor for some types of capital. Thus, long run demand for labor is more elastic than short run.

Combined Effects A wage decline will result to: An Output Effect Q to Q (short run) A Substitution Effect - Q to Q (long run)

Isoquant-Isocost Analysis of Long Run Labor Demand Isoquant Downward slope Convexity to the origin (MRTS= K/ L) Higher output to the northeast Isocost Plabor/Pcapital Least cost combination of K and L MRTS = PL/PK

Deriving the Long Run Labor Demand Recall: I = 10 Plabor =4 Pcapital = optimal level = 15 What if price of labor increased to 1? a-b ----SE b-c ---- OE

Long Run Labor Demand

Elasticity of Labor Demand The sensitivity of the quantity of labor demanded to wage rate changes (wage elasticity coefficient) Ed = % Qd for labor / % in wage rate Elastic - >1; employers are responsive to wage changes Inelastic - <1; employers are relatively insensitive to wage changes

Total Wage Bill Rules Total Wage Bill = W x Qlabor RECALL effect of elasticity to TR e.g. price and demand is elastic TR Thus, if labor demand is elastic, wage will total wage bill (increases the wage bill but creates a decline in employment)

Seatwork ½ crosswise Determinants of elasticity: Explain how the following affect elasticity of labor demand: 1. Elasticity of product demand. Ratio of labor costs to total costs 3. Substitutability of other inputs (capital) 4. Supply elasticity of other inputs Determinants of Labor: Illustrate the effect of the following to labor demand, ceteris paribus: 1. Increase in product demand. Increase in marginal product of labor (productivity) 3. Decrease in the number of employers 4. The price of capital increased and it is a gross substitute for labor 5. The price of capital decreased and it is a gross complement of labor

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