labour market Flashcards
what happens when there is a positive supply shock?
shift production fn upwards, MPN increase at every level of input
labour DD assumptions
hold total capital stock fixed (short run)
workers are alike
competitive labour mkt
firms max profit
max profit problem
max pi(K,N) = AF(K,N) - wN
FOC of max profit prob
MPN = W
plot graph of production function
plot Y against N
concave and upward sloping
plot graph of labour DD
plot w against N
curve is MPN=w, convex and downward sloping
positive supply shock to labour DD graph
ND shifts up and to the right. increase MPN at every N
increase size of capital stock to labour DD graph
increase K, increase MPN
labour SS: income-leisure trade off
max u(w(h-l),l)
FOC of income leisure trade off
MRS of leisure for consumption = real wage
MUl/MUc = w
plot graph of income leisure trade off
plot c against l, slope is MRS
wh is vertical intercept, h is horizontal intercept
at tangency, MRSlc=w
indiff curve is convex, w BL c=w(h-l), slope= - w
increase in wages to MRS=w graph
- sub effect
increase price of leisure relative to consumptions -> fall in l and increase in NS - income effect
higher wealth, increase in leisure (normal good)
sub effect dominates –> upward sloping NS curve (overall fall in l and increase in c)
factors that shift labour SS
- wealth –> increase leisure –> fall in NS
- expected future real wage
(same as above) - size of working age pop
- labour force participation rate
labour mkt eqm
ND=NS
negative supply shock on labour mkt eqm (increase in energy prices)
fall in A, fall in MPN for any N. ND shifts down, fall in w and N in eqm