Chapter 12 Wages and Employment in Perfect Competition
total product formula
# of units of output workers produce
If a firm can handle 93 calls a day and it's 10$ a call what is the total revenue. With 5 accountants paid at 150 what is the total cost What is is left after costs
$930. $750 in costs $180 left
individual labor supply (4)
- each seller is a wage taker -income- leisure trade offs determined by wage rate -choose the best combination of income and leisure -reservation wage, lowest wage rate at which a individual would supply labor to a particular labor market
increase in labor demand: short run (3)
-excess demand ( found at bottom of graph) -wage increases -employment increases
in product and factor markets what is the job of the firms (2)
-firms supply goods and services to product market - firms demand resources from factor markets
Shits in labor supply -labor supply in specific markets-
Can be affected by preferences, population, incomes, price of related goods, expectations. Ex. Wage reduction in surgeons, supply surgeons go down increases in family doctors and improved job opportunities for women have decreased supply of nurses, to the left.
What happens as minimum wage is increased
Causes MOVEMENT along demand curve Decreases employment Increases income Increases quantity of labor supplied Decreases quantity demanded
Shifts in labor supply -preferences-
Change in attitude value leisure more shift left Want to work more shift right
Shifts in labor supply-prices of related goods/services
Cost of child care falls (compliment of work effort) cheaper to go to work , supply of labor increases Recreational activities (substitute of work) become cheaper increase in leisure and decrease in labor supply
The more supply rises the smaller the increase in wage will be even if demand is rising
Decrease in employment
Decrease in labor demanded
Decreases in wage and decrease in employment
Increase in labor supply
Decreases wage, increases employment Supply increase cuz of increase in population, increase in amount of work people Are Willing to do
For the income effect: Increase in wage increases
Demand for leisure and increase in income results in reduction of quantity of labor supplied Always negative effect
firms employment decision profit maximizing employment level (w)
Hire worker when MRP>W MRP curve intersects wage line MRP=W (MFC=W)
Implicit costs
Income forgone ( opportunity cost) of not shifting resources
Shift in labor supply- population-
Increase in pop. Increases labor supply Increase number of workers could shift supply curve right and put downward pressure on wages
For substitution effect: increases in wage
Increase in quantity labor supplied and increases demand for leisure and increases income Always positive effect
MRP =
Labor demand curve
Shifts in Market a labor SUPPLY curve -rise in wage rate in one market-
Leftward shift in labor supply curve in other market
Leisure is what type of good
Normal. Increase in income will increase the demand for leisure
firms employment decision in product market
P= constant MRP=P x MPL MRP first rises then falls
Marginal revenue a firm receives equals the market determined..
Price. MRP= MR x P
Shifts in Market Labor Supply (4)
Rise in wage rate in one market Rise in number of qualified people Increase in the cost of acquiring human capital Changes in taste
as long as wage rates can adjust changes in Labor Supply or Labor Demand should not cause what...
Shortage or Surplus of Labor
Gap between quantity of labor supplied and the quantity demanded
Surplus Increases employment
Explain why the demand for labor is a derived demand.
The demand for labor is derived from the demand for the output it is used to produce. ( increase in demand for product increases price and increases demand for factors that produce product; same with decreases)
Explain why each firm in a competitive labor market is a wage taker
This constrains the firm's labor market behavior: it cannot decide what wage to pay; it can decide only how many workers to hire at the going wage rate. In the short run, firms will set the marginal revenue product of labor equal to the wage rate to decide how many workers to hire.
Explain how a firm determines how much of a resource it should employ.
To maximize profit, a firm should increase its employment of any resource whenever marginal revenue product (MRP) exceeds marginal factor cost (MFC). If the MFC exceeds (is greater than) the MRP then the firm has hired too many of that factor of production, and needs to cut down in hiring that resource.
average product formula
Total product/# of workers
the Market Labor SUPPLY curve slopes which way
Upward
What happens when Gov. Raise the demand for labor
Wages and employment increase
Decrease in supply of labor
Wages increase, employment decreases Caused by decreases in population
a pure monopsony labor market (3)
a single firm is the only employer monopsony: -MFC at any level of employment is greater than the wage rate -MFC curve lies above the labor supply curve -maximize profit, increase employment until MRP=MFC
marginal factor cost (MFC)
amount a factor adds to a firms total cost per period. change in total cost divided by change in quantity of factor ^TC / ^f (MFC=W)
marginal revenue product (MRP)
amount an additional unit of a factor adds to a firms total revenue MRP=MP x MR 2 step process: increases firms output, and the increased output increases firms Total Revenue
marginal revenue product of labor formula
change in total revenue/change in quantity of labor or *marginal revenue product X Price*. (P.1)
shifts in market labor DEMAND curve -decrease in price of another input-
complementary - demand shifts rightward substitute - demand shifts leftward
the demand for a resource
derived demand arises from and varies with the demand for the firms output
complementary factors of production
factors of production for which an increase in their use of one increases the demand for another - such as increase in marginal product increases demand for acc. Ex. Human capital
substitute factors of production
factors of production for which an increases in the use of one decreases the demand for another
product markets
firms sell goods and services to households or other firms
The Market Demand for Labor
horizontal sum of all firms individual labor demand curves, total number of workers all firms in a labor market want o employ at each wage rate (p.4)
supply and demand drive a competitive labor market to its equilibrium point
labor supply and labor demand curves intersect
shifts in market labor SUPPLY curve -cost of acquiring human capital-
leftward shift
shifts in labor SUPPLY curve -rise in wage rate in one market-
leftward shift in other market
law of diminishing marginal returns says if the quantity of a factor increase while other inputs are held constant
marginal product will eventually decline
when to maximize profit and increase and decrease employment (3)
maximization MRP=MFC increase MRP>MFC decrease MRP<MFC
the downward sloping portion of a firms marginal revenue product curve is its demand curve for a product for a variable factor
maximize profit by hiring additional units of labor up to the point where the downward-sloping portion of the marginal revenue product curve intersects the marginal factor cost curve
will a increase in wage rate create a shift or movement to the market labor demand curve
movement
factor markets
resources are sold to firms
what does the horizontal Market Labor DEMAND curve represent
summation of all firms' individual labor demand curves
the higher the wage...
the greater quantity of labor supplied
when workers gain additional human capital
their marginal product rises, the demand for them by firms increase
when will people choose to work in a market
when the wage exceeds their reservation wage
demand for labor by a single firm (2)
- increases employment for any resource, doing so adds more revenue than it adds to cost -marginal revenue product (change in TR for one unit increase in the resource) MRP= ^TR/^quantity of resource
key takeaways
-In using the model of demand and supply to examine labor markets, we assume in this chapter that perfect competition exists—that all workers and employers are price takers. -A firm's demand curve for a factor is the downward-sloping portion of the marginal revenue product curve of the factor. -The market demand for labor is found by adding the demand curves for labor of individual firms. -The market demand for labor will change as a result of a change in the use of a complementary input or a substitute input, a change in technology, a change in the price of the good produced by labor, or a change in the number of firms that employ the labor.
firms employment decision in labor market (2)
-MFC for any change in employment is the market wage rate (W) -wage taker firms/worker takes market wage
shifts in labor SUPPLY curve (6)
-changes in the prices of related goods and services -changes in income -changes in population -Change in expectations -changes in preferences -labor supply in specific markets
examples that cause shifts in labor demand (4)
-changes in use of other factors of production __complementary & Substitute - changes in technology -changes in product demand __derived demand -changes in # of firms hiring
shifts in market labor SUPPLY curve -changes in taste- (4)
-different types of jobs attract different people with different tastes -danger and excitement vs. safety and routine -women entering the workforce -social contribution to community
Firms labor demand curve
-downward sloping portion of MRP curve __how much labor the firm will want to employ at each wage rate
market labor supply (2)
-higher the wage rate in a labor market, the greater the quantity of labor supplied in the market -labor supply curve, the number of people who want jobs in a labor market at each wage rate
in product and factor markets what is the job of the households (2)
-households demand goods and services from Product markets -households supply of resources to factor markets
increase in labor demand: long run (4)
-labor supply increases -excess supply ( found at top of graph) -wage decreases -employment increases
what causes Shifts in Market Labor Demand Curve (4)
-price of the product -price of another input -tech -number of firms hiring
labor shortages (2)
-quantity of labor DEMANDED exceeds quantity SUPPLIED -wage rate fails to rise to its equilibrium value
labor surplus (2)
-quantity of labor SUPPLIED exceeds quantity DEMANDED -wage rate fails to fall to its equilibrium value
Explain two reasons why labor is different from other things that are traded. (2)
-sellers of labor care about many things besides their wage when they look for a job -the price of labor (the wage rate) is the key determinant of most people's incomes and living standards.
market for college educated labor (5)
1) college wage premium -percentage by which average college graduates income exceeds average high school graduates income 2) labor supply shifts rightward every year -increases in population of young people attending college -population increase 3)labor demand shifts rightward each year -economic growth -tech change (comp. right-sub. Left) -increase skill requirements 4) last 2 decades-increase in yearly wage rate -the demand curve shifted rightward faster than the supply curve 5) future -labor demand curve will shift rightward more rapidly than labor supply curve over next years -increase wage rate
List the characteristics of a perfectly competitive labor market and explain why this model is used so often to answer questions about the labor market (3)
1) there are many buyers and sellers (each of whom is only a tiny part of the labor market), 2) workers appear the same to firms, and 3) workers can easily enter into or exit from the market. is used so often to analyze labor markets because it yields fairly accurate predictions, even in many cases in which labor markets are not perfectly competitive.
Shifts in labor supply - income-
Increase demand for leisure reducing labor supply Income increases such as marriage, inheritance, lottery are non labor increases in income, likely to reduce labor supply shifting to left
2 aspects for understanding labor supply
Leisure is s normal good and opportunity cost or price of leisure is the wage an individual can earn.
Shift in labor supply -expectations-
Life expectancy and available SS. Stay working could induce increase in labor supply
firms in monospony labor markets; -employ fewer workers -produce less output -pay lower wages than firms in purely competitive markets
MFC curve lies above labor supply Wage rate is found on the labor supply curve
The supply curve is also what
Marginal factor cost curve for labor
The marginal factor cost is a horizontal line that also represents
Market wage. MFC =W
long run labor supply
after full adjustment to change in wage rate, more wage elastic
how does A monopsonist maximize profit
by increasing employment of any resource whenever MRP exceeds MFC
marginal factor cost formula (MFC)
change in total cost/change in quantity of resource
marginal product formula
change in total product (output) /change in#of workers -usually goes up by 1 so change in output basically
examples the cause shifts in labor Supply (6)
changes in - preferences - income - prices of related goods and services - population - expectations - labor supply in specific markets
shifts in market labor DEMAND curve -price of a product rises- ( change in product demanded)
demand for labor increases, shift rightward Increase I demand for product increases price and increases demand for factors that produce ( same with decreasing)
the firms labor demand curve when only Labor is variable is the ...
downward sloping portion of its Marginal Revenue Product curve
reservation wage
lowest wage rate at which a individual would supply labor to a particular labor market
shifts in market labor DEMAND curve - change in number of firms-
new firms enter demand shifts right (local wages for workers goes up) firms leave demand shifts left
shifts in market labor DEMAND curve -technology change -
rightward if tech is complementary with labor leftward if tech is substitute for labor
shifts in market labor SUPPLY curve -rise in # of qualified people-
rightward shift, population growth
short run labor supply
sellers who already have the skills and geographic location
human capital
sets of skills and abilities workers bring to the production of goods and services
the Labor SUPPLY curve is less responsive to wage changes in short or long run
short run because people can acquire new skills or move locations