3. Labour Demand Flashcards

1
Q

How is the initial production function a very restricted view?

A
It doesn’t include:
•many factors
•many outputs 
•different types of workers 
•different wages
•different quality of product
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2
Q

Profit max equation

A

Pi= pq- wE- rK

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3
Q

Short run definition

A

A period during which the firm can’t change K and there are a fixed number of firms

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4
Q

MPE

A

Marginal product of labour

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5
Q

VMPE

A

Value marginal product of labour (in monetary terms)

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6
Q

VAPE

A

Value average product of labour

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7
Q

Where does the firm employ labour?

A

Up to the point where VMPE=W and where VMPE is declining

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8
Q

Short run elasticity of demand equation

A

dSR= (change in E)/(change in W) x W/E

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9
Q

When is short run elasticity of labour demand inelastic and elastic?

A
  • inelastic if |dSR|<1

* elastic if |dSR|>1

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10
Q

Long run

A

Where firms can vary capital and employment. It is also possible that other firms can enter the market

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11
Q

Isoquant properties

A
  1. Downward sloping
  2. Don’t intersect
  3. Higher isoquants have higher q
  4. Convex to the origin
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12
Q

What is the slope of an isoquant?

A

(Change in K)/(Change in E) = -MPE/MPK

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13
Q

What is the absolute value of an isoquant slope called?

A

The marginal technical rate of substitution

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14
Q

Describe the MRS between E and K

A

They are diminishing since they are convex

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15
Q

Equation of an isocost

A

K= c/r- WE/r

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16
Q

What is true with an interior solution for cost minimisation?

A

Slope of isoquant (MPE/MPK)= slope of isocost (W/r)

17
Q

Does cost minimisation imply profit maximisation?

A

No, profit max requires W= p x MPE and r= p x MPK

18
Q

What is the impact of wage reduction?

A
  • the scale effect causes the firm to use more labour and capital
  • the substitution effect causes the firm to use more labour
19
Q

What is the impact of increasing wages?

A
  • reduces labour

* can increase or decrease capital depending on the scale and substitution effect

20
Q

Why is the elasticity of demand hard to estimate?

A

•we can’t just look at the relationship between wages and employment because they themselves are outcomes of supply and demand- there are many other unobserved variables

21
Q

What does the magnitude of the substitution depend on?

A

The curvature of the isoquant

22
Q

Equation for elasticity of substitution

A

Elasticity = ((%change in k)/L) /((%change in W)/r)

23
Q

When is the elasticity of substitution positive?

A

Always because if w/r increase then K/L can’t fall

24
Q

Values of elasticity of substitution for perfect substitutes and perfect compliments

A
  • perfect substitutes ó= infinity

* perfect compliments ó=0

25
Labour demand is more elastic the greater…
* the elasticity of substitution * the elasticity of demand for output * labours share in total costs * the supply elasticity of other factors of production
26
Predictions about unions
* they may resist new technology which allows greater substitution of capital and labour * may resist competition in product markets * unions that organise small groups of particular occupation may be more successful * unions may attempt to increase the price of other inputs
27
How much of each input will a profit maximising firm use?
They will use each input up to the point where VMPi is equal to the price of that input
28
Equation for cross elasticity of demand
% change in xi/ % change in wj
29
Capital skill complementary hypothesis
* unskilled Labour and capital are substitutes | * skilled labour and capital are compliments
30
Relationship between technology and labour
* long term evidence is that technology doesn’t reduce employment * technology substitutes and compliments labour * there are short term effects with winners and losers