1 / 7

3.3 Demand in the short run: perfect competition (product market)

3.3 Demand in the short run: perfect competition (product market). Conclusion: the firm will be facing a MPL curve, which is the main element behind its labor demand curve To see the relation between MPL and the labor demand curve we must make use of monetary units ($) Numerical EXAMPLE.

chul
Download Presentation

3.3 Demand in the short run: perfect competition (product market)

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. 3.3 Demand in the short run: perfect competition (product market) Conclusion: the firm will be facing a MPL curve, which is the main element behind its labor demand curve To see the relation between MPL and the labor demand curve we must make use of monetary units ($) Numerical EXAMPLE

  2. 3.3 Demand in the short run: perfect competition (product market) • Observations (example): • When MPL is decreasing • (Zone 2, LDR) • P is fixed, it won’t go down while increasing output • Perfect competition: DC is perfectly elastic (horizontal) • Columns (1) & (6): DL in the SR • Rule or equilibrium condition (profit max.) MRPL = MWC • MWC = Δ W paid for an additional unit of L • If MRPL > MWC  L up • If MRPL < MWC  L down

  3. 3.3 Demand in the short run: perfect competition (product market) • Assuming firms are “wage-takers”  no effect on W  MWC = W  MRPL = W • Competitive firm will use L up until MRPL = W • The DL curve indicates the amount demanded at different levels of W • Only under perfect competition MRPL = VMPL • Producers can sell all they want at P • The additional sale increases earnings by P x u. • The additional earnings for producing with 1u. more of L = VMPL

  4. 3.4 Demand in the short run: imperfect competition (product market) • Most of the firms: some market power • Some effect on prices • DC is no longer perfectly elastic • Negative slope • Product differentiation • To sell more (while adding L), P should now drop • The sale of 1 extra u. does not contribute as in PC • MRPL ≠ VMPL • Conclusion: MRPL falls not only by LDR, but also due to the fact that P should drop if we want to sell/produce more • This cut in P is applicable to all previous units

  5. 3.4 Demand in the short run: imperfect competition (product market) • Numerical EXAMPLE • As before: MRPL = W D’L curve • Ceteris paribus, D’L is less elastic than DL • That is, firms with certain monopolistic power are less affected by changes of W • Higher restriction on output  fewer workers • It is more beneficial to produce less • MRPL (in PC) = VMPL > MRPL (under IC)

  6. Demand in the short run • Summing up: • DL is a derived demand of DC • Insofar as L increases (with K), YC increases: • First, at a growing rate (MPL up) • Then at a decreasing rate (MPL down) • But later, it becomes negative (MPL < 0) • MRPL = W  MRPL in zone 2 is the DL • Under IC, YC and L are restricted  MRPL ≠ VMPL

  7. 3.5 Demand in the long-run • L & K are both variable • YLR= f ( L, K ) • DL* indicates the L that firms employ at each W with L & K variables • In introducing t, we can now think of substitution • Scale effect: ΔL as a result of ΔY (due to ΔW, Δcosts) • Substitution effect: ΔL as a result of ΔRP (due to ΔW) • Consequence: DL* is more elastic than DL • Other factors which make it even more elastic: • DC • Interactions K-L • Technology

More Related