Chapter 3 The Demand for Labor
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dison Wesley Longman, Inc. © 2000 Chapter 3 The Demand for Labor
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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 - PowerPoint PPT Presentation
Transcript of Chapter 3 The Demand for Labor
Addison Wesley Longman, Inc. © 2000
Chapter 3
The Demand for Labor
Addison Wesley Longman, Inc. © 2000
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
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Short Run
• K fixed
• Firm chooses Q
• Chooses L given K
• Marginal Product of Labor changes
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Example – Apples are $.50Wages are $4.50
# hired output MPL Price MRP
0 0 - .50 -
1 16 16 .50 8
2 32 16 .50 8
3 42 10 .50 5
4 50 8 .50 4
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Demand for Labor in the Short Run (Real Wage)Figure 3.1
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Demand for Labor in the Short Run (Money Wage)Figure 3.2
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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
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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
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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
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The Market Demand Curve and Effects of an Employer-Financed Payroll Tax
Figure 3.7
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Payroll Tax with a Vertical Supply CurveFigure 3.8
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A Production FunctionFigure 3A.1
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The Decline Marginal Productivity of LaborFigure 3A.2
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Cost Minimization in the Production of Q* (Wage = $10 per Hour; Price of a Unit of Capital = $20)
Figure 3A.3
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Cost Minimization in the Production ofQ* (Wage = $20 per Hour; Price of a Unit of Capital = $20)
Figure 3A.4
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The Substitution and Scale Effects of a Wage IncreaseFigure 3A.5
