HW_C3 - Chapter 3 The Demand for Labor This chapter studies...

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Chapter 3 The Demand for Labor This chapter studies the downward sloping nature of the labor demand curve. It begins with a section that discusses profit maximization, and it moves deductively from the assumption of profit maximization to the marginal conditions with respect to labor. These conditions are expressed in simple mathematical terms, and they are also discussed verbally. Additional insights into the marginal productivity theory of demand are provided in a section discussing common objections to this theory of demand. The analysis of demand begins with the assumption that both labor and product markets are competitive; in this context, we first consider the short run before moving on to the long run and the case with more than two inputs. We then consider the demand for labor when the product market is not competitive. The chapter concludes with a policy analysis of payroll taxes that demonstrates the insights that can be derived from an understanding of the demand for labor. The principal conceptual tool employed involves distinguishing between the wage rate employers pay and the wages employees receive. When these two wages differ, one must be stated in terms of the other for the demand and supply curves to be shown together. When a payroll tax is introduced, one of the two curves must therefore shift, and there will be related changes in both wages and employment. The appendix to Chapter 3 is designed for students who feel comfortable using microeconomic theory at the intermediate level. We derive the demand for labor graphically using a two-factor model in both the long run and short run. Both substitution and scale effects are graphically illustrated, and the assumptions underlying the demand curve are more rigorously presented. Any instructors wishing to skip over the appendix can do so without loss of concepts needed to understand the basics of the demand for labor. ± List of Major Concepts 1. The assumption of profit maximization by firms underlies the theory of labor demand. The process of profit maximization requires considering small changes in inputs (or outputs), and comparing the marginal revenue generated by an additional input with its marginal expense. 2. The marginal product of labor is the added output generated by adding a unit of labor, holding capital constant. 3. If markets are competitive, firms perceive prices as given. 4. The difference between the short run and long run depends on the fixity of capital. 5. The concept of diminishing marginal productivity is discussed. 6. The relationship between the demand for labor curve and the downward sloping portion of a firm’s marginal product of labor curve is analyzed. 7. The demand for labor can be stated in terms of either the real or the nominal wage.
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Chapter 3 The Demand for Labor 13 8. The relationship between the demand curve of individual firms and the market demand curve is briefly discussed.
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HW_C3 - Chapter 3 The Demand for Labor This chapter studies...

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