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Chapter 28

Chapter 28. Labor Demand and Supply (How many laborers should a firm hire, and at what wage?). The Factor Market – Perfect Competition.

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Chapter 28

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  1. Chapter 28 Labor Demand and Supply (How many laborers should a firm hire, and at what wage?)

  2. The Factor Market – Perfect Competition • In the factor market households supply their labor, capital and natural resources in markets that are perfectly competitive, or 1 of the imperfect forms of competition. • Perfect Competition: • Supply of labor is perfectly elastic • At equilibrium wage rate the firm can hire as many laborer as it wants to

  3. Marginal Physical Product • (MPP) - ∆ in output that results from the addition of 1 more worker • Declines due to diminishing marginal returns • Marginal Revenue Product: the incremental worker’s contribution to the firm’s total revenue • Marginal Factor Cost: the wage rate of each worker • = ∆ in TC (See pg. 677) ∆ in amount of resource used - Wage rate = $830 In a PC market this is also the perfectly elastic supply curve - firm can purchase all the labor it wants at this wage (Panel b)

  4. Hiring Rule • Hire to the point where add.’l cost of hiring 1 more worker = add.’l revenue generated by that worker • For perfect competition this is = to wage rate = MRP • Panel b p. 677 - s drawn @ wage rate d curve is the MRP E is where the 2 intersect (MFC = MRP)

  5. Derived Demand • Labor demanded b/c it is used to produce output that will be sold for a profit • If the price of the product produced rises or falls, the MRP will shift accordingly, & fewer or more workers will be needed

  6. Market Demand for Labor(28-3 p. 681) • $20 - 10 people - market supply of 2000 • Wage decrease to $10 means more hired up to 15 • As firms hire more, supply increases & price of the product will fall • (Panel a) MRP curve shifts L to d1 & each firm’s labor increases to 15 - market Q is 3000

  7. Determinants of Demand Elasticity for Inputs • % ∆ in Qd / % ∆ in price of labor • Less than 1 = inelastic • = 1 = unit-elastic • More than 1 = elastic • Determinants – greater if: • Pe for final product is greater • Input is easily substituted • Larger proportion of total costs accounted for by a particular variable input • Longer time period being considered

  8. Wage Determination • Supply curve for labor sloped up for industry • Individual firm can hire all they want @ going rates, (b/c the firm represents such a small part of the market) – so the firm’s supply curve for labor is perfectly elastic • If industry wage rate goes up or down surpluses & shortages are created, but competition will again lead to an equilibrium

  9. Other Wage Determination Theories • Efficiency Wages - higher-than-competitive wage rates: • Workers have more incentive to be productive so they can keep their higher paying job • Insiders Versus Outsiders: • Current employees “with pull” create barriers to entry for outsiders who are willing to work for lower real wages

  10. Shifts in Market Demand & Supply of Labor • Demand Curve Shifts: • ∆ in demand for final product shifts that market DC for labor in the same direction • ∆ in labor productivity shifts the labor DC in the same direction, due to more capital, technological improvements, etc. • ∆ in P of a substitute input will cause demand for labor to ∆ in same direction • ∆ in P of complementary input will cause the D for labor to ∆ in opposite direction • Supply of Labor Determinants: • ∆ in wage rates of another industry • ∆ in working conditions in an industry • Job flexibility

  11. Monopoly in the Product Market • For anything other than PC the DC for its product is downward sloping • P must fall to sell more • MR is continuously falling • Monopolist will continue to product as long as additional profits are made, despite hiring more workers • Until wage rate = add.’l revenues (MRP) • Monopolists hire fewer workers b/c they must account for declining product price

  12. Profit Maximization – Cost Minimization • Profit-maximizing combination of resources: • MRP of labor = price of labor • MRP of capital = price of capital • MRP of land = price of land • Cost minimization: • MPP of labor = MPP of capital = MPP of land price of labor price of capital price of land

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