Chapter 5 from the book: the demand for labor Flashcards
is there a lot of influence from the government in the labor market?
ye bruv
what do all government regulations that benefit employees in the market have in common?
they in- crease employers’ costs of hiring workers
what is the fundamental assumption of labor demand theory?
firms seek to maximize profits
what are the two most important things to be noted about firms’ constant search of profit maximization?
First, a firm can make changes only in variables that are within its control
Second, our theory must address the small (“marginal”) changes that must be made almost daily
when will the profit-maximizing firm want to expand output by one unit?
if the added revenue from selling that unit is greater than the added cost of producing it
As long as the marginal revenue from an added unit of output exceeds its marginal cost, the firm will continue to expand output
when will the profit-maximizing firm want to contract output?
whenever the marginal cost of production exceeds marginal revenue
when are profits maximized?
when output is such that marginal revenue equals marginal cost
MRPL = MEL
what are the two inputs that firms will use to have gyu outputs?
labor and capital
how do you find the marginal income associated with a unit of input?
the change in physical output produced * MR generated per unit of physical output
marginal product of labor
the change in physical output produced
the change in physical output (Delta Q) produced by a change in the units of labor (Delta L)
MPL = Delta Q / Delta L
basically, the change in output produced by a change in amount of workers
the change in the (physical) output of a firm when it changes its employment of labor by one unit
the input’s marginal revenue product
the marginal income produced by a unit of input
ex: if the presence of a tennis star increases attendance at a tournament by 20,000 spectators, and the organizers net $25 from each additional fan,
the marginal income produced by this star is equal to her marginal product (20,000 fans) times the marginal revenue of $25 per fan
Thus, her marginal revenue product equals $500,000
marginal product of capital
the change in output associated with a one-unit change in the stock of capita
MPK = Delta Q/ Delta K
basically, the change in amount of output produce cause by a change in money
what is the marginal revenue in Purely Competitive Market?
the price of one unit to sell
Firm’s marginal revenue product of labor,
or MRPL formula
MRPL = MPL * MR
MRPL = MPL * P
firm’s marginal revenue product of capital (MRPK)
or MRPK formula
MRPK = MPK * MR
MRPK = MPK * P
marginal expense of labor (MEL) (C)
changes in expenses associated with a change in labor
what is a firm’s marginal expense of labor (MEL) (C) if it operates in a competitive labor market
it has no control over the wages that must be paid (it is a “wage taker”
MEL is simply equal to the market wage
the short run varies from firm to firm
what does every firm need to decide in their particular short runs?
the firm needs only to decide whether to alter its output level
when is labor’s marginal product positive?
when output increases as labor is added
law of diminishing marginal returns in marginal product of labor
as employment expands, each additional worker has a progressively smaller share of the capital stock to work with
when are profits maximized in a competitive market?
MPL * P = W
how do you find the profit maximization point in units in a competitive market
MPL = W/P
if an individual’s marginal product of labor (MPL) depends on the firm’s capital stock,
what would an increase in capital stock cause to the MPL?
the entire MPL schedule would shift up
what does the demand curve (or schedule) for an individual firm indicate?
indicates how much labor that firm will want to employ at each wage level
slopes downwards
what does the market demand curve (or schedule) indicate?
it is just the summation of the labor demanded by all firms in a particular labor market at each level of the real wage
slopes downwards
for the market and individual firm demand curves, what happens when real wage falls?
demand for labor increases
what must a firm adjust to maximize profits in the long run? why?
the firm must adjust both labor and capital
so that the marginal revenue product of each equals its marginal expense
in the long run, which formulas must be satisfied to achieve profit maximization?
MPL * P = W
P = W/MPL
MPK * P = C
P = C/MPK
W/MPL = C/MPK
what is the profit-maximizing formula for capital?
MPK * P = C
what is the meaning of W/MPL?
W is the cost of a unit of labor
MPL he extra output produced by an added unit of labor
Therefore, the ratio W/MPL turns out to be the added cost of producing an added unit of output when using labor to generate the increase in output
what is the meaning of C/MPK?
cost of producing an extra unit of output using capital
what does the formula W/MPL = C/MPK suggest?
to maximize profits, the firm must adjust its labor and capital inputs
the goal is to make the marginal cost of producing an added unit of output using labor equal to the marginal cost of producing an added unit of output using capital
it must be operating at the point such that further marginal changes in both labor and capital would neither lower costs nor add to profits
what happens when W rises in the short run?
- disturbs the equality in equation P = W/MPL
- this will make the the firm will want to cut back on its use of labor even before it can adjust capital
- any cuts in labor will raise MPL
- because each unit of capital now has less labor working with it, the MPK falls, disturbing the equality in equation P = C/MPK
- this will cause the firm to want to reduce its stock of capital
- the equation W/MPL = C/MPK takes the , meaning marginal cost of production using labor now exceeds the marginal cost using capital
what happens in the long run when W rises?
the equation W/MPL = C/MPK will get restored
when are two inputs substitutes in production?
when the greater use of one in producing output can compensate for reduced use of the other
when you decide to use an input more often than another input to produce output and these are substitutes in production,
what happens when the price of the latter increases?
The demand curve of he former will shift to the right to replace it
what does any shift of the demand curve of an input depend on when other inputs are involved?
on the relative strength of the substitution and scale effects between two inputs
when does the scale effect dominate the substitution?
when an increase in the price of one input shifts the demand for another input to the left
when are two inputs said to be gross complements?
when an increase in the price of one input shifts the demand for another input to the left
when does the scale effect dominate the substitution?
when are two inputs said to be gross substitutes?
when an increase in the price of one input shifts the demand for the other input to the right
when the substitution effect dominates
how are inputs called when they must be used together
they are called perfect complements or complements in production
what is the formula for a monopoly wanting to maximize profits?
MRPL = MR * MPL = W
what is the formula of the demand for labor for a monopoly?
(MR/P) * MPL = (W/P)
is the marginal revenue of a monopoly the same of its product price?
nah
marginal revenue is always less than a monopoly’s product price
are wage rates of a monopoly always different from that of a competitive marker?
nah boy
who has the burden of employee’s payroll tax?
both employers and employees
employers pay the tax rolls
as a result, there is downward pressures on the wage rates
what affects the proportion of the employer payroll tax that gets shifted to employees’ wages?
The extent to which the labor market supply curve is sensitive to wages
if the labor supply is not responsive to wage changes,
basically, if the supply is inelastic and a vertical curve,
what happens to the overall equilibriums and payroll taxes?
since they are not responsive wage changes, a larger part of payroll taxes can be shifted to employees in the form of wage decrease
Qs remains the same, but for a much lower wage
what is the opposite of a payroll tax on employers?
a government subsidy of employers’ payrolls
instead of taxing each hour of labor by X, the government paid the employer X
what effect does the government subsidy of employers’ payrolls cause on the demand of labor curve?
the market labor demand curve would shift upward by a vertical distance of X
X being the amount of subsidy
basically, whole curve shifts to the right
what does the shift of the demand of labor curve caused by a government subsidy of employers’ payrolls do to the labor market equilibrium?
creates pressures to increase employment and the wages received by employees
what are the forms that payroll subsidies can take?
cash payments
tax credits that reduce overall cost of hiring labor
to who do wage subsidies apply to?
to a firm’s employment level
to any new employees hired after a certain date (even if they just replace workers who have left)
or only to new hires that serve to increase the firm’s level of employment
what are the types of wage subsidies
general or selective
general subsidies
not conditional on the characteristics of the people hired
selective subsidies
it is targeted
makes the subsidy conditional on hiring people from certain target groups (such as the disadvantaged)
