Lecture 6, 7: Labor Demand Flashcards
Production function
Describes the technology that the firm uses to produce output (q) = goods and services.; =f(E,K)
Marginal Product of Labor
the change in output resulting from hiring an additional worker, holding constant the quantities of other inputs (e.g. capital).
Marginal product of capital
the change in output resulting from employing one additional unit of capital, holding constant the quantities of other inputs (e.g. labor).
Total product curve
relationship between output and number of workers hired by the firm (holding capital fixed).
Marginal Product Curve
output produced by each additional worker,
Average product curve
q/E
Profits
pQ – wE – rK
Total Costs
(wE + rK)
Short Run
The firm’s capital stock is fixed at some level K
Value of the Marginal Product (VMP)
number of units of output employee produces times the price the output sells at; VMP = MP*Output Price
Short run demand = what curve?
VMP curve
Short run elasticity of labor demand
% change in employment/ % change in wage
Isoquant Curves
describe the possible combinations of employment and capital that produce the same level of output
Marginal Rate of Technical Substitution
Rate at which capital and labor can be substituted and maintain a given output level.
Isocost Line
all labor–capital bundles that exhaust a specified budget for the firm.
Slope of Isocost
-w/r
Slope of Isoquant
-MPL/MPK or (‐w/r).
Which is more elastic, the short-run or long-run demand curve?
Long-run demand curve
What are Marshall’s 4 rules?
Rule 1: Labor demand is more elastic the greater the price elasticity in the output market.
Rule 2: Labor demand is more elastic the greater the elasticity of substitution between Labor and Capital
Rule 3: Labor demand is more elastic the greater the elasticity of supply of K
Rule 4: Labor demand is more elastic the greater the fraction of a firm’s total costs are due to labor.
