Chapter 2 Labor Demand Flashcards
are business organizations that employ resources to produce goods or services for the market.
Firms
Why do firms demand for labor
Firms demand labor primarily to produce goods or provide services
Labor also provides value to companies through their
work, which allows companies to earn money and make profit.
Labor is a critical input in the production process, and firms require workers to perform various tasks to produce, distribute, and sell their goods or services
Firms seek to hire workers to maximize productivity,
increase output, meet consumer demand, and ultimately generate profits.
Define labor demand
Labor demand is the amount of labor that the employers are willing and able to hire at a particular wage rate during a given time period in a given market or industry
the quantity of labor services the firm would employ at each wage
Amount of Labor
- the firms, businesses, or organizations seeking to hire labor
Employers -
- he firms, businesses, or organizations seeking to hire labor
Willing and able -
desire to meet the firmβs production requirements and capacity to accommodate new
employees
Wage Rate
β the type of labor market where firms compete for labor to meet their production needs
Market
Labor demand is derived from the __________produced by workers and other factors that affect a firmβs decision to hire more employees
demand for goods and
services
. The level of demand for labor directly
depends on the _______
demand for the goods or services those workers will produce.
describes the inverse relationship between the wage rate and the quantity of labor
demanded.
Labor Demand curve
A _____________indicates that employers will be willing and able to hire more workers at
lower wage rates than at higher wage rates, ceteris paribus
downward sloping demand curve
negative relationship between the wage and the quantity of labor demanded is the result of two effects:
substitution effect and scale effect.
is the change in the quantity of labor demanded by firms due to the relative price
changes between labor and other factors of production.
Substitution effect
When the price of labor (wages) increases, firms
might substitute capital (e.g., machines, automation) for workers. This substitution keeps production costs
down
Substitution effect
considers how changes in the wage rate impact overall
production or output levels.
scale effect
when wages increase, the cost of production goes up, potentially causing firms
to decrease the overall scale of production. This decrease in output would also lead to a decrease in labor
demand.
scale effect
is caused by the change in the wage rate.
Change in quantity labor demanded
Graphically, a movement
along a demand curve reflects the effect of a change in wage rate on the quantity of labor demanded.
Change in quantity labor demanded
indicates the total number of workers all firms in a labor market want to
employ at each wage rate. It is found by horizontally summing across all firmsβ individual labor demand
curves.
market labor demand curve
it is found by horizontally summing across all firmsβ individual labor demand
curves.
market labor demand curve
is brought by factors other than a change in the wage rate which causes firms to
demand more or less labor.
Change in labor demand
Graphically, the shift of the labor demand curve depicts the change in nonwage determinants.
Change in labor demand
Non-wage Determinants of Labor Demand
Product demand
βͺ Productivity
βͺ Technology
βͺ Non-wage Costs
βͺ Numbers of Firms (Employers)
βͺ Profitability
βͺ Prices of Another Inputs
βͺ Labor Unions
βͺ Taxes and Subsidies
m is a major driver of labor
demand.
The demand for goods and services produced by a firm
When consumer demand increases, firms may need to hire (less or more ) workers to meet production and
demands.
hire more workers
If labor productivity increases, firms will demand (less or more) labor at each wage rate and the firmβs
demand for labor itself will increase.
demand more labor
When many firms in
a labor market acquire a new technology, the market labor demand curve will _________ if the
technology is complementary with labor
shift rightward
When many firms in
a labor market acquire a new technology, the market labor demand curve will ________if the
technology is substitute for labor
shift leftward
are costs that do not directly vary with the number of hours worked by the worker. These include
hiring costs, training costs, and employee benefits
Non-wage labor costs.
A rise in non-wage labor costs will shift the market labor demand curve __________
leftward.
A fall in non-wage labor
cost will shift the market labor demand curve _________
right.
The entry of
new firms will shift the market labor demand curve __________ and exit will shift the curve to the__________
rightward, left.
If a
companyβs profitability rises, it will be able to recruit additional employees. This will result in ___________
an increase in
labor demand.
When the price of some other input
decreases, the market labor demand curve may shift rightward or leftward. It will shift rightward if that other
input is _____________ with labor and leftward if the other input is ______________for labor.
complementary, substitutable
is a worker association that bargains with employers over wages, benefits, and
working conditions
Labor Union
It is always viewed that firm as an economic decision
maker, is striving to __________
maximize profit
The firm faces three constraints as it decides how much labor to employ
- Its technology determines how much output the firm can produce with each quantity of labor.
- The market price in its product market tells the firm how much it can sell its output for.
- The market wage rate in its labor market tells the firm how much it must pay each worker.
is the additional revenue generated by employing an additional factor
unit, such as one more unit of labor. In other words, MRP of labor is the change in total revenue from hiring
one more worker.
Marginal Revenue Product (MRP
Mathematically, MRP is calculated by
ππ
π =
βππ
/β ππ’πππ‘ππ‘π¦ ππ πΏπππr
Firms, aiming to maximize profit, will hire workers up to the point where
the wage rate equals the MRP of
the last worker hired.
To maximize profit, the firm should hire the number of workers such that
ππ π = π.
shows the relationship between inputs and outputs. It specifies how much output is
produced by any combination of labor and capital
production function
The total product for a firm in the short
run is:
π = π(πΎ, πΏ), where K is fixed.
depicts the relationship between the quantity of labor employed (input) and the total output
produced (output) by the firm, holding all other factors of production constant.
Total product
represents the additional output produced by each additional unit of labor input, while
holding all other inputs constant.
Marginal product
It represents the rate of change in total output with respect to changes in
labor input. Initially, the marginal product of labor tends to increase as more workers are hired, reflecting the
benefits of specialization.
Marginal product
curve shows the average output produced per unit of labor input, calculated by dividing
total output by the quantity of labor employed.
Average product
It provides insights into the productivity of labor on average
within the production process.
Average product
Stages of Production
Stage 1 (Increasing Returns to Labor)
Stage 2 (Diminishing Returns to Labor.
Stage 3 (Negative Returns to Labor).
As more labor is added, marginal product increases, leading to a
rise in total product. This stage is characterized by underutilization of other inputs.
Stage 1 (Increasing Returns to Labor)
Characteristics of Stage 1 (Increasing Returns to Labor)
TP increases at an increasing rate.
βͺ MP increases and then decreases.
βͺ MP is greater than AP.
βͺ AP increases and reaches it maximum and has positive
Marginal product begins to decline even though total product
continues to increase. This stage indicates that additional units of labor are becoming less productive.
Stage 2 (Diminishing Returns to Labor
Characteristics of Stage 2 (Diminishing Returns to Labor
TP increases at a decreasing rate and reaches its peak.
βͺ MP has a negative slope as it decreases.
βͺ MP is less than AP.
βͺ AP falls and has still positive slope
Marginal product becomes negative, leading to a decrease in total
product. This stage occurs when adding more labor actually reduces total output due to overcrowding or
inefficiencies.
Stage 3 (Negative Returns to Labor).
Characteristics of stage 3
TP begins to decrease and has a negative slope.
βͺ MP turns negative and is moving down.
βͺ AP continuously falls and now has a negative slope
If the wage rate rises, firms will cut back on the labor they hire. How much they cut back depends on the
elasticity of demand for labor, which is the percentage change in the quantity demanded of labor divided by
the percentage change in the price of labor (the wage rate).
Elasticity of Labor Demand
measures the responsiveness of the quantity demanded of labor to the
wage rate.
e wage elasticity coefficient
) implies that percentage change in quantity labor demanded is greater that
percentage change in wage
Elastic labor demand ( π¬π³ > π )
implies that percentage change in quantity labor demanded is less than
percentage change in wage
Inelastic labor demand ( π¬π³
< π )
The relationship between the elasticity of demand for the product and the
elasticity of demand for labor is as follows:
The higher the elasticity of demand for the product, the higher the elasticity of demand for the labor
that produces the product.
βͺ The lower the elasticity of demand for the product, the lower the elasticity of demand for the labor
that produces the product.
Labor costs are a part of
Total cost
Thus, price rises more when labor costs are a larger percentage of total costs. And, of
course, the more price rises, the more the quantity demanded of the product falls. Therefore, labor, being a
derived demand, is affected more.
Ratio of Labor Costs to Total Costs.
Number of Substitute Inputs
The more substitutes for labor, the higher the elasticity of demand for labor.
βͺ The fewer substitutes for labor, the lower the elasticity of demand for labor
