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Chapter 3 The Demand for Labor

Chapter 3 The Demand for Labor. Profit Maximization. Marginal Benefit Marginal Product (MP) MP = change in Q/change in L Marginal Revenue (MR) = P MB=MP*MR Marginal Expense = wages Optimal Solution: MB=ME. Short Run. K fixed Firm chooses Q Chooses L given K

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Chapter 3 The Demand for Labor

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  1. Chapter 3 The Demand for Labor

  2. Profit Maximization • Marginal Benefit • Marginal Product (MP) • MP = change in Q/change in L • Marginal Revenue (MR) = P • MB=MP*MR • Marginal Expense = wages • Optimal Solution: MB=ME

  3. Short Run • K fixed • Firm chooses Q • Chooses L given K • Marginal Product of Labor changes

  4. Example – Apples are $.50Wages are $4.50

  5. Figure 3.1 Demand for Labor in the Short Run (Real Wage)

  6. Figure 3.2 Demand for Labor in the Short Run (Money Wage)

  7. Long Run • K can vary • MRPL = MR*MP = wage • MRPK=MR*MP = cost of capital • If MR=P then P=w/MPL P=c/MPK • W/MPL=C/MPK

  8. If wages rise Equation is no longer equal - cut L, raise K • MPL rises • MPK falls • Cut K • Adjust until optimal again Scale Effect – less of both Substitution Effect – less L, more K

  9. Effect of Increase in the Price of One Input (k) on Demand for Another Input ( j ), Where Inputs Are Substitutes in Production Figure 3.3

  10. The Market Demand Curve and Effects of an Employer-Financed Payroll Tax Figure 3.7

  11. Figure 3.8 Payroll Tax with a Vertical Supply Curve

  12. Figure 3A.1 A Production Function

  13. Figure 3A.2 The Decline Marginal Productivity of Labor

  14. Cost Minimization in the Production of Q* (Wage = $10 per Hour; Price of a Unit of Capital = $20) Figure 3A.3

  15. Cost Minimization in the Production of Q* (Wage = $20 per Hour; Price of a Unit of Capital = $20) Figure 3A.4

  16. Figure 3A.5 The Substitution and Scale Effects of a Wage Increase

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