LaborDemand_6

# LaborDemand_6 - Labor Demand What is labor demand? A firms...

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1 Labor Demand Ch3 pp. 59-70 Labor Demand What is labor demand? A firm’s demand for labor is function, or schedule, describing how much (what quantity of) labor the firm would like to hire at different wage levels. This firm would be willing to hire 10 workers at a wage of \$18/hour or 20 workers at a wage of \$12/hour. Demand Wage (\$/hour) 10 20 Quantity (number of workers) 12 18 Labor demand: L(W) Inverse labor demand: W(L) Labor Demand Our goal is to use certain information about a firm and the markets it participates in to determine the firm’s labor demand. Labor demand is said to be a derived demand, because firms need labor in order to produce goods and services which provide revenue to the firm. In our model, a firm operates in the following way: Labor Market, W Capital Market, C Production Q = F(L,K) Output Q Capital K Labor L Output Market, P \$\$\$ \$\$\$ \$\$\$ Costs The firm chooses input quantities, L and K. For a given input combination, L and K, the total cost to the firm is the cost of labor, W*L plus the cost of capital, C*K. TC = W*L + C*K W is the price of labor (wage) and C is the price of capital. Revenue and Profit For a given input combination, L and K, the output of the firm is given by the production function Q = F(L,K). An example of a production function is: Q = F(L,K) = 10*L 1/2 K 1/2 For a given output level, Q, total revenue is the price in the output market, P, times the quantity of output, Q. TR = P*Q = P*F(L,K) Profit, π , is equal to total revenue minus total cost. π = TR – TC = P*F(L,K) – W*L – C*K A Note on Market Structure By giving W, C and P as parameters, rather than functions of L, K and Q, respectively, we implicitly assumed that the labor, capital and output markets were all competitive. We say that the firm does

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## This note was uploaded on 10/22/2008 for the course ECON 470 taught by Professor Yeonsookim during the Fall '08 term at Maryland.

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LaborDemand_6 - Labor Demand What is labor demand? A firms...

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