chapter 5 PP: the demand for the labor Flashcards by Badr Lotfi

for a product price-taking and input price taking firm,

what do maximizing decisions mainly involve?

should we increase or decrease output?

how to increase or decrease output?

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what does the search for profit improving possibilities mean?

small (“marginal”) changes must be made almost daily

Must approach profit maximization incrementally through the trial-and-error process of small changes

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when marginal revenue is larger than marginal cost,

must output be increased or decreased?

output must be increased

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when marginal cost is larger than marginal revenue,

must output be increased or decreased?

output must be decreased

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when does a firm reach to profit maximizing quantity of output?

when MR = MC

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what are the inputs that firms can control?

capital and labor

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when should a firm use more of a certain input?

when its MRP (additional income) > MEi (additional expense).

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when should a firm reduce the use of a certain input?

when its MRP < MEi

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when are changes of inputs no longer desirable?

when the firm’s MRP = MEi

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which inputs are needed to produce a certain level of output (Q)?

labor (L) and capital (K)

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how do you calculate the marginal product of labor?

MPL = ΔQ/ΔL

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how do you calculate the marginal product of capital?

MPK = ΔQ/ΔK

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what is the marginal product?

is the difference in quantity of output produce when you change a change a certain input such as labor or capital?

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what is the marginal revenue in a purely competitive product market?

MR = AR = P

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what is the marginal revenue in an impurely competitive product market?

MR < AR = P

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how do you find the Marginal revenue product of Labor (L) in the general case?

MRPL = MPL * MR

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how do you find the Marginal revenue product of Labor (L) in competitive markets?

MRPL = MPL * P

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how do you find the Marginal revenue product of Capital (K) in the general case?

MRPK = MPK * MR

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how do you find the Marginal revenue product of Capital (K) in competitive markets?

MRPK = MPK * P

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Marginal expense of labor (MEL)

the change in total labor cost for each additional unit of labor hired

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how do you find the Marginal expense of labor (MEL) in a competitive labor market? why?

MEL = W

each worker hired is paid the same wage (W) as all other workers

horizontal supply curve

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how do you find the Marginal expense of Capital (MEK) in a competitive capital market? why?

MEK = C

each additional unit of capital will have the same rental cost (C)

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what is the production function of a firm in the short run when both product and capital markets are competitive?

why?

what does it mean?

Q = f(L, K_)

the firm cannot vary its stock of capital

This means the firm needs only to decide whether to alter its output level;

how to increase or decrease output is not an issue, because only the employment of labor (L) can be adjusted

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what will a firm in a competitive product and capital market decide in the short run? what does its decisions in the short run comprise of?

why?

the firm needs only to decide if it should alter its output level

how to increase or decrease output is not an issue

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why is the way a firm increases or decreases its output not an issue in the short run in a competitive labor and capital market?

because only the employment of labor (L) can be adjusted

what is assumed when both product and labor markets are competitive?

All producers or sellers are price takers in the product market All employers of labor are wage takers in the labor market

in competitive labor and capital markets why does the marginal product of labor (MPL) eventually decline? in the short run

since in the short run, capital remain constant, at one point, the workers each have less capital to work with this in turn makes them less productive, with each smaller contributing to lesser and lesser output this is the law of diminishing returns it is important to note that, at first, the marginal product of labor increases until it reaches that maximum

law of diminishing marginal returns in competitive labor and capital markets

Eventually, adding more L will produce progressively smaller increments of output this is after the marginal product of labor reaches the maximum efficiency

considering the marginal revenue product of labor (MRPL), when is profit maximization reached in competitive labor and capital markets? in the short run

when employment is such that any further one-unit change in labor would have a marginal revenue product equal to marginal expense when MRPL = MEL

considering the marginal product of labor (MPL), when is profit maximization reached in competitive labor and capital markets? in the short run

when MPL * P = W MPL = W/P

how is the real wage found in competitive labor and capital markets? in the short run

W/P

how can labor demand be analyzed in competitive labor and capital markets? in the short run

in terms of either real or money wages

what does the negative slope of the labor demand indicate in competitive labor and capital markets?

indicates that each additional unit of labor employed produces a progressively smaller increment in output

At any real wage determined by the market, when should a firm in competitive labor and capital markets employ labor? in the short run

when MPL = W/P

at what point is a firm's level of employment profit maximizing in competitive labor and capital markets? in the short run

MPL = W/P

at what point is a firm's level of employment too small in competitive labor and capital markets? it is not generating enough profit

when MPL > W/P employment level E1 is less than E0 firm could increase profit by adding Labor (L)

at what point is a firm's level of employment too big in competitive labor and capital markets? it is not generating enough profit

when MPL < W/P employment level E2 is greater than E0 firm could increase profit by decreasing Labor (L)

why does the MRPL decline in competitive labor and capital markets? is it okay to think its because workers are wankers?

MRPL does not decline because added workers are incompetent it declines because capital stock is fixed hence added workers have less capital or equipment to work with at the end of the day, it declines because because of diminishing marginal product of Labor (MPL)

are the MRLP and MPL curves the same in competitive labor and capital markets? why or why not? in the short run

ye boooy because MRPL = W for a profit maximizer who takes wages as given

the market demand curve in competitive labor and capital markets (not the one of individual firms) is a summation of what?

the summation of the labor demanded by all firms in a particular labor market at each level of the real wage

what happens in competitive labor and capital markets when real wages fall?

the number of workers that existing firms want to employ increases

what happens in competitive labor and capital markets when real wages rise?

the number of workers that existing firms want to employ decreases

in competitive markets, will the demand for labor be affected in the long run if the firm has the ability to adjust other inputs such as capital?

yeee

what must firms do in competitive markets to maximize profits in the long run?

firms must adjust Labor (L) and Capital (K) inputs the goal is that each inputs marginal revenue product (MRP) equals its marginal expenses (ME)

which equations in the long run ensure that each of a firm's achieves profit maximization in the long run?

MPL * P = W MPK * P = C P = W/MPL P = C/MPK W/MPL = C/MPK

what is the meaning of W/MPL?

added cost or marginal cost (MC) of producing an added unit in this case, using labor to increase input

what is the meaning of C/MPK?

added cost or marginal cost (MC) of producing an added unit in this case, using capital to increase input

which adjustment has to be made if W increases when W/MPL = C/MPK?

Adjustment will have to be made to the use of labor (L) The firm will have to cut back on the use of L

when W/MPL = C/MPK, what happens when a firm cuts back on the use of L?

there could be either the scale effect or the substitution effect

the scale effect caused by a rise in W when W/MPL = C/MPK

Each unit of capital (K) has less labor (L) working with it therefore, the marginal product of capital (MPK) falls then, the firm’s profit-maximizing level of output falls

the substitution effect caused by a rise in W when W/MPL = C/MPK

will make the firm to change its input mix by substituting capital for labor

are Capital and Labor the only inputs used in the production process?

nah boooy

which which are the sub categories of labor?

age educational level occupation

when are inputs gross complements?

when the scale effect dominates the substitution effect when an increase in the price of one input shifts the demand for another input to the left

when are inputs gross substitutes?

when the substitution effect dominates the scale effect when the increase in the price of one input shifts the demand for the other input to the right

when are goods considered to be perfect complements or complements in production?

When two inputs must be used together in some proportion no substitution effect, only scale effect

are monopoly producers price takers or price makers?

price makers boooy

are monopoly producers wage takers or wage makers?

wage takers boooy

what do monopoly producers use to determine the profit-maximizing level of employment?

MRPL = MEL

till what point will a monopoly hire?

MRPL = MR * MPL = W

what do payroll taxes require?

require employers to remit payments based on their total payroll costs

what are payroll taxes used for?

Unemployment insurance Social Security retirement Disability Medicare/Medicaid

what are the effects of payroll taxes to the demand curve?

Payroll taxes will shift the labor demand curve to the left

when will employers retain all of their employees if the former are imposed payroll taxes?

if the entire tax burden is passed onto the workers workers’ wages fall by the tax amount of X (hence, W – X)

what is the burden employees bear of payroll taxes?

lower wage rates and lower employment levels

which amount of the tax would be passed on on workers if the labor supply curve was vertical?

the entire amount of the tax will be shifted to workers in the form of a decrease in their wages W - X

what does the tax burden on either employees or employers depend on?

on the elasticities of labor demand and labor supply both curves' responsiveness to changes in wages

what are different forms government subsidies of employers’ payroll can take?

Cash payments Tax credit to employers general selected/targeted

how do subsidies affect the demand curve for labor?

shift the labor demand curve to the right pressures to increase employment levels pressures to increase wages received by employees