Chapter 5 - The Demand for Labor Flashcards
What is objectives of firms?
Profit maximization, where profit = total revenue – total cost.
What are the two types of inputs when assuming that a firm produces its output by combining these two?
Labor and Capital
When assuming that a firm produces its output by combining two types of inputs, or factors of production: labor and capital. Then:
- If the income generated by employing one more unit of an input exceeds the additional expenses, then add a unit of that input.
- If the income generated by one more unit of input is less than the additional expense, reduce employment of that input.
- If the income generated by one more unit of input is equal to the additional expense, no further changes in that input are desirable.
What is the Marginal Product (MP) formula?
Marginal product of labor MPL: MPL = ∆Q/∆L (holding capital constant)
Marginal product of capital MPK: MPK = ∆Q/∆K (holding labor constant)
What is Marginal Revenue (MR)?
The extra revenue generated by the selling of the one extra unit of good. If the firm is in a perfectly competitive market, then MR=P, P is the price of the good, and all firms are price takers.
What is Marginal Revenue Product of Labor?
a. MRPL = MPL ∗ MR (in the general form)
b. When the product market is perfectly competitive, then MR=P, in the above equation.
What is Marginal Revenue Product of Capital?
a. MRPK = MPK ∗ MR In the general form
b. MRPK = MPK ∗ P When the product market is perfectly competitive
What is Marginal Expenses of Labor (MEL)?
We assume that the labor market is perfectly competitive, therefore, the labor supply curve to firms is horizontal at the going wage w0. w0 is the marginal expense of labor.
What is Marginal Expense of Capital (C)?
The expense of renting a unit of capital for one time period.
Demand for labor in the short run:
In the short run, i.e. the capital is fixed, and the firm only adjust the number of employment of labor to decide whether to alter its output level.
a. In the short run, assuming MPL increases initially then decreases, and the profit maximization condition takes place when MPL decreases. For expository convenience, we assume that MPL is always decreasing (diminishing marginal returns).
b. In the short run, profit maximization should satisfy the condition:
MRPL = MEL
1) . If the product market is perfectly competitive, and the labor market is perfectly competitive, then MEL=w, and MR=P; therefore the above condition
becomes: MPL ∗ P = w
(1) The profit maximization for hiring labor in terms of physical quantities is therefore: MPL = w/P
(2) The firm’s demand for labor in the short run is equivalent to the downward-sloping segment of its MPL schedule.
True or False:
The market demand curve is the summation of the labor demanded by all firms in a labor market at each level of real wage. The market demand curve is also slope downward as a function of the real wage.
True
What is policy application?
Employer payroll taxes and Wage Subsidies
