Chapter 5

What is the output effect?

The output effect is the change in employment resulting solely from the effect of a wage change on the employer's cost of production. A wage decrease causes a decrease in marginal cost which causes an increase in output!

What are the 2 implications of elasticity of product demand driving elasticity of labor demand?

1. Imperfect competition firms are less elastic since marginal revenue is less than price and so product demand is less elastic and so labor demanded is also less elastic! 2. In long run, labor demand is more elastic!

What are the 2 factors that the strength of labor demand depends on?

1. Labor's marginal productivity and 2. The market value or price of a given product

What are the other 3 factors that make a firm's long run labor demand curve more elastic than short run?

1. Product demand 2. Labor-capital interactions and 3. Technology

What is the approximate long run labor elasticity in the US? percentage caused by output and sub effects?

1.0. 67 percent output effect and 33 percent sub effect!

What is a production function?

A production function is a relationship between quantities of resources and the corresponding products (inputs and outputs).

Effect of prices of other resources?

If gross substitutes, price decrease in a resource will decrease demand for labor. If complements, then price decrease in a resource will increase demand for labor!

What is the underlying basis for the firm's short tun demand for labor curve?

Marginal product

What is the combined effect of the substitution and output effects?

Output effect causes more labor to be demanded in short run and then substitution effect causes substitution for more labor in long run leading to a more elastic labor demand curve in the long run! a to b to c on graph!

Effect of number of employers on labor demanded?

Same direction!

What constitutes a perfectly competitive firm's short run labor demand curve? What proves this?

THE MRP schedule does. This is a result of the fact that a profit maximizing employer should hire workers so long as each successive worker adds more to the firm's total revenue than to its total cost. This is true as long as the MRP for a given laborer exceeds the MWC for that same laborer. MWC=Wage under perfect competition since firms are price takers.

What is the total product in the short run?

Total output produced by each combination of the variable labor and fixed capital!

What are the 4 determinants in the labor elasticity for demand?

1. Elasticity of product demand 2. Ratio of labor costs to total costs 3. Substitutability of other inputs 4. Supply elasticity of other inputs

What is the formula for the wage elasticity coefficient?

Ed=percentage change in quantity of labor demanded/percentage change in the wage rate

Other general trends by industry and demand elasticity?

Education elasticity greater than average. Teenagers higher than adults. Greater for production workers than for nonproduction workers. Higher for lower skilled workers than for high skilled workers. Larger in nondurable good industries than in durable good industries!

How do graphs differ for perfect and imperfect conditions?

Imperfect is more downward sloping, less elastic! Monopoly would have less output in lower wage conditions and as a result not hire as many workers! Also note that the Marginal revenue accruing to an imperfect seller from hiring an additional unit of labor is less than the market value of the extra output the unit of labor helps produce!

How does the phenomenon that occurs in stage 2 differ than what occurs in stage 1 or 3?

In stage 1, additions to labor increase both the efficiency of labor and the efficiency of capital due to the increasing average product and total product. Firm will move at least to left boundary of stage 2 as a result. In stage 3, the addition of labor reduces the efficiency of both labor and capital since average product and total product are falling. Firm will not operate in this region as a result.

What is the marginal product in the short run?

Marginal product is the change in total product associated with the addition of one more unit of labor. Can be determined by drawing the line tangent to the total product graph at any point and taking the slope of that line! Absolute change in total product!

Effect of productivity (marginal product) on labor demanded?

Same direction!

What is the effect of product demand on labor demand?

Same direction!

What are the best examples of fields with a high degree of labor elasticity due to labor costs being a high percentage of total costs?

Service industries such as education, temporary workers, and building maintnenceq

What are the stages of production?

Stage 1A-Total product curve is increasing at an increasing rate. This implies that marginal product is increasing! AP is also rising as MP>AP Stage 1B-Total product is increasing at a decreasing rate. Marginal product is decreasing. AP is increasing as MP>AP! At end of this stage MP=AP and so AP is at its maximum Stage 2- The zone of production. Total product continues to rise at a diminishing rate. Marginal product and average product are both falling! At end of this stage Total product reaches its maximum! Stage 3- Total product falls, as well as MP and AP! Additional labor decreases the product!

What is the substitution effect?

States that the firm can respond to a wage reduction in the long run by substituting some capital for labor. Makes demand curve in long run more elastic!!!

What real world applications were discussed?

Textile and apparel industries, fast food workers, personal computers, minimum wage, temp workers.

What are the 2 resources in respect to the labor market? And what do we assume when examining a firm's short run production function?

The 2 resources are labor and capital. We assume that one of these resources is fixed in the short run (capital) TP=f(L, K') where K'=fixed capital

What is the average product in the short run?

The average product is the total product divided by the number of labor units

Why does the MRP equal the VMP in a perfectly competitive market?

The firm is a price taker in a perfect competition situation. Therefore, it can sell as many units of output as it desires at the market price. The sale of each additional unit of product adds the product price to the firm's total revenue, therefore the marginal revenue is constant to the product price. As a result, the extra revenue that results from employing an additional labor unit (MR X MP) equals the social value of the extra output (P X MP) contributed by the unit of labor.

How does the substitutability of other inputs effect labor demand elasticity?

The greater the sub. of other inputs for labor, the greater the elasticity of labor!

What is the main difference between perfect and imperfect market conditions?

The imperfect competitive demand curve is downward sloping rather than perfectly elastic due to the fact that marginal product falls as more units of labor are employed and product price declines as output increases! The second reason is the difference as diminishing marginal returns happens in competitive conditions as well.

What is the law of diminishing marginal returns?

The law states that as successive units of a variable resource such as labor are added to a fixed resource such as capital, beyond some point the marginal product attributable to each additional unit of the variable resource will decline.

What is meant by the zone of production of the total product curve?

The left hand of this region represents the spot where labor is maximized as a unit as total product per unit of labor is at its maximum. AP is at its maximum here! The right hand of the region represents when capital is maximized as a unit of total product because total product is at its highest! Therefore, this region is known as the zone of production because if a firm chooses to operate, it will want to produce at a level of output where changes in labor contribute to increasing efficiency of either labor or capital!

What is meant by the long run demand for labor?

The long run demand for labor is a curve indicating the amount of labor firms will employ at each possible wage rate when both labor and capital are variable. Effected by wage rate change that creates a short run output effect and long run substitution effect which together alter employment.

What is the marginal revenue product?

The marginal revenue product is the increase in total revenue resulting from the employment of each additional labor unit. Marginal revenue product in a perfectly competitive market is equal to the price multiplied by the marginal revenue.

What occurs with the phenomenon of market demand for labor?

The market demand for labor is less elastic than what would be yielded by a summation of all the individual firms labor demand that the market consists of. This is a result of the price change that occurs in a market as a result of a wage decrease, as if all firms increase labor supply as a result of the wage decrease and produce more product, then the price of the good will come down!!!!

How does the supply elasticity of other inputs effect the elasticity of labor demand?

The more elastic the supply of other inputs, the more elastic the demand!! Ex: If demand for other input such as capital increases and supply is elastic such that capital experiences only a small price increase, then the labor demanded will also be elastic!

What is the value of marginal product (VMP)? What is it equal to in a perfectly competitive market? How is it calculated?

The value of marginal product is the extra output in dollar terms that accrues to society when an extra unit of labor is employed. It is equal to MRP in a perfectly competitive market and it is calculated through multiplying marginal product by price.

How is total revenue calculated?

Total product multiplied by price

What 2 quantities that were previously equal differ in noncompetitive situations?

VMP and MRP

This means that demand for labor depends on the demand for the product or service it is helping to produce or provide

What is meant by the fact that labor demand is a derived demand?

What is the trend of total wage bills with quantity of labor demanded?

When elastic, total wage bill goes in opposite direction of wage rate. When inelastic, same direction. When equal, unit elastic!