Chapter 3 The Demand for Labor

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