Lecture 15 Notes - Econ 101 Introduction to Microeconomics...

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Unformatted text preview: Econ 101 Introduction to Microeconomics Professor Richard V. Burkhauser 18 The Markets for the Factors of Production Key Concepts factors of production, p. 394 production function, p. 396 marginal product of labor, p. 396 diminishing marginal product, p. 396 value of the marginal product, p. 397 capital, p. 406 derived demand, class output effect, class substitution effect, class Econ 101 Professor Burkhauser Short Run Demand for Labor in the Cookie Industry Capital Fixed Labor Variable Econ 101 Professor Burkhauser Figure 18.1 Firm's Output Choice in the Short Run S(W*) MC(W*) P* D Q* q* Industry Cookie Market Firm Firm's Output Choice in the Short Run Profit maximization condition: P = MC P* determined by market Firm takes P* as given Chooses q* to maximize profit Econ 101 Professor Burkhauser Demand for Labor is a Derived Demand P* = MC MC = w*dl/dq P*dq/dl = W* Value Marginal Product (VMP) = W* See Table 13.1. Econ 101 Professor Burkhauser Table 13.1 Relationship between Marginal Physcial Product and Marginal Cost Labor (l) 0 1 2 3 4 5 6 7 Capital (k) 5 5 5 5 5 5 5 5 Total Output (q) 0 10 30 45 55 60 64 66 MPP dq/dl 0 10 20 15 10 5 4 2 Wage (w) 5 5 5 5 5 5 5 5 w/(dq/dl) MC w(dl/dq) $0.50 $0.25 $0.33 $0.50 $1.00 $1.25 $2.50 5/10 5/20 5/15 5/10 5/5 5/4 5/2 Figure 18.2 Demand for Labor in the Short Run W S D(P*, K0) W* D(P*) L* L l* Industry Labor Market Firm Firm's Labor Demand in the Short Run Profit maximization condition: VMP = W* W*: determined by the market Firm takes W* as given Chooses l to maximize profits In equilibrium, l will exactly map into q for a given production function (Dual) Econ 101 Professor Burkhauser Table 18.1: How the Competitive Firm Decides How Much Labor to Hire VMP and MC Labor K0 Cookie Output (q) Marginal Physical Product Price (P*) Value MP (P*dq/dl) Wage (W*) MC W*/(dq/dl) 0 1 2 3 4 5 6 7 8 10 10 10 10 10 10 10 10 10 0 5 15 30 50 65 75 83 88 -5 10 15 20 15 10 8 5 $2 $2 $2 $2 $2 $2 $2 $2 $2 -$10 $20 $30 $40 $30 $20 $16 $10 $20 $20 $20 $20 $20 $20 $20 $20 $20 -$4.00 $2.00 $1.33 $1.00 $1.33 $2.00 $2.50 $4.00 Figure 18.3 Derived Demand Firm's Demand for Labor when Price of Cookies = $2 Price of Cookies = $2 VMP $10 $16 $20 $30 $40 L 8 7 6 5 4 $40 $30 $20 $16 $10 4 D(2*,K0) Price of labor 5 6 7 8 Figure 18.4 Marginal Cost of Cookies for a Competitive Firm (Wage = $20) $/unit $4.00 MC (W = $20) $2.50 $2.00 $1.33 $1.00 5 1 MR 15 2 30 3 50 4 65 5 75 83 88 6 7 8 q l Table 18.2: An Increase in Price from $2 to $4 VMP and MC Labor K0 Cookie Output (q) Marginal Physical Product Price (P*) Value MP (P*dq/dl) Wage (W*) MC W*/(dq/dl) 0 1 2 3 4 5 6 7 8 10 10 10 10 10 10 10 10 10 0 5 15 30 50 65 75 83 88 -5 10 15 20 15 10 8 5 $4 $2 $4 $2 $4 $2 $4 $2 $4 $2 $4 $2 $4 $2 $4 $2 $4 $2 -$20 $10 $40 $20 $60 $30 $80 $40 $60 $30 $40 $20 $32 $16 $20 $10 $20 $20 $20 $20 $20 $20 $20 $20 $20 -$4.00 $2.00 $1.33 $1.00 $1.33 $2.00 $2.50 $4.00 Figure 18.5 Derived Demand Firm's Demand for Labor when Price of Cookies = $2 Price of Cookies = $4 VMP $20 $32 $40 $60 $80 L 8 7 6 5 4 $40 $30 $20 $16 $10 4 D(2*,K0) 0 D(4*,K ) Price of labor 5 6 7 8 Figure 18.4 Marginal Cost of Cookies for a Competitive Firm (Wage = $20) $/unit $4.00 MC (W = $20) MR $2.50 $2.00 $1.33 $1.00 5 1 MR 15 2 30 3 50 4 65 5 75 83 88 6 7 8 q l Figure 18.6 Effect of a Change in Demand for Cookies D1 D1 P2 P1 S (W1) MC(W1) Q1 Q2 q1 Firm Cookie Market q2 Industry Figure 18.7 Effect of a Change in Demand for Cookies D2(P2) D1(P1) d1(P1) d2(P2) W1 S L1 Industry L2 l1 Firm Labor Market l2 Question 18.1: Marginal Product of Labor A competitive firm sells its output for $45 per unit. It employs 30 workers, and the marginal product of the 30th worker is 4 units of output per day. It pays its workers a wage of $180 per day. a) The firm's profit would increase if it hired a 31st worker. b) For the 30th worker, the value of the marginal product of labor is $600. c) For the 30th worker, the marginal product of labor is $600. d) For the 30th worker, the value of the marginal product is $180. e) For the 30th worker, the marginal product of labor is $180. Econ 101 Professor Burkhauser Question 18.2: Shift in Labor Demand For perfectly competitive, profit maximizing firms, the demand curve for labor will shift in response to a change in the a) Elasticity of the supply curve of labor b) Elasticity of the supply curve of capital c) Wage rate d) Quantity of labor demanded e) Price of the product that the firm sells Econ 101 Professor Burkhauser Figure 18.8 Effect of an Increase in Labor Supply on the Labor Market d(P1) D(P1) W1 W2 S1 S2 L1 L2 l1 l2 Industry Labor Market Firm Figure 18.9 Effect of an Increase in Labor Supply on the Cookie Market D1 S(W1) S(W2) MC(W1) AC(W1) P1 P2 MC(W2) AC(W2) Q1 Q3 Q2 q1 q3 q2 Industry Cookie Market Firm Figure 18.10 Effect of an Increase in Labor Supply on the Labor Market d(P1) D(P1) W1 W2 S1 S2 D(P2) L1 L3 L2 l1 l3 l 2 d(P2) Industry Labor Market Firm Summary: Short Run Effect of an Increase in Labor Supply 1. 2. 3. 4. 5. 6. Supply of labor increases (from S1 to S2) Wages fall (from W1 to W2) Price of cookies falls (from P1 to P2) Quantity of cookies demanded increases (from Q1 to Q3 and from q1 to q3) Quantity of labor demanded increases (from L1 to L3 and from l1 to l3) Exact increase will depend on elasticity of demand for cookies and how much price falls in response to a fall in wages L = sL DW = L and W = W where L L W Econ 101 Professor Burkhauser Question 18.3: Fall in Wages with Perfectly Inelastic Demand for Cookies If the demand for cookies is perfectly inelastic, a fall in the price of labor would lead to no change in the quantity of labor demanded in the short run. a) True b) False c) Uncertain Econ 101 Professor Burkhauser Long Run Demand for Labor in the Cookie Industry Capital variable Labor variable Econ 101 Professor Burkhauser Long Run: Output and Substitution Effects of a Change in Wages In the long run, a change in wages will have two effects on the demand for labor: Output Effect: A change in wage will change firms' marginal costs and shift the supply curve of the industry leading to a change in market price and the quantity demanded of the output. The quantity of labor demanded will change with the change in the quantity of output demanded in response to the wage change. L = s L DW Substitution Effect: If labor becomes cheaper relative to capital, firms will substitute labor for capital for any given level of output and vice versa. L = - sK W Econ 101 Professor Burkhauser Long Run: Output and Substitution Effects K L 1 K L 2 K L 3 K L 4 K L 5 K L 6 A fall in wages leads to: K L 1 L 2 K L 3 K L 4 K L 5 K L 6 K L 7 K L 8 K Output effect: Two more cookies are produced Substitution effect: More labor and less capital is used in the production of each cookie Econ 101 Professor Burkhauser Long Run: Net Effect of a Fall in Wages Positive output effect and positive substitution effect: Increase in labor demanded A fall in wages will also have two effects on capital demanded: Output effect: Lower price of product, increased quantity of product demanded will lead to a positive effect on capital demanded Substitution effect: More labor relative to capital being used in the production of each cookie will lead to a negative effect on capital demanded Positive output effect and negative substitution effect: net change in capital demanded is uncertain; depends on the magnitudes of the output and substitution effects Econ 101 Professor Burkhauser Technical Appendix: Elasticity of Substitution of Capital for Labor for Homothetic Production Functions K ( K / L) = ( w / r ) Ease of substitution between capital and labor when their relative prices change isoquant L Technical Appendix: In an industry with constant returns to scale Hicksian Derived Demand Equations (The Theory of Wages, 1932) = s D - s W + s D + s R + D L L K K K [ [ = s D + s W + s D - s R + D K L L K L [ [ Alfred Marshall's Rules of Derived Demand for Labor 1. The derived demand for labor will be more elastic the more price elastic is the demand for the product that labor produces. = s D W L L 1. The derived demand for labor will be more elastic the easier it is to substitute other productive factors for labor. [ L = [ - s K ]W Econ 101 Professor Burkhauser Alfred Marshall's Rules of Derived Demand for Labor 1. The derived demand for labor will increase or decrease with a change in the price of an alternative factor depending on whether the output or substitution effect is greater = s D+s R L K K [ Econ 101 Professor Burkhauser Alfred Marshall's Rules of Derived Demand for Labor 1. 2. 3. 4. 5. The derived demand for labor will be more elastic the more price elastic is the demand for the product that labor produces. The derived demand for labor will be more elastic the easier it is to substitute other productive factors for labor. The derived demand for labor will be more elastic the greater is the ratio of labor costs to total costs [ if D > ]. The derived demand for a productive service (labor) will be more elastic, the more elastic is the supply of the other productive services (capital). The derived demand for labor will increase or decrease with a change in the price of an alternative factor depending on whether the output or substitution effect is greater. Econ 101 Professor Burkhauser Links between Factor and Product Markets How does an increase in the minimum wage impact: Quantity of low-skilled labor demanded Supply of product Price of product Quantity of product sold Marginal and average cost curves of the marginal firm Demand for high-skilled labor Quantity of high-skilled labor demanded Wage of high-skilled labor Econ 101 Professor Burkhauser Links between Factor and Product Markets 1 WL S Minimum wage WH D' S 4 D D' Low Skilled Labor Market L D L High Skilled Labor Market AC' 2 $ MC' MC(w,r) AC(w,r) P S' S 3 D Q Firm Output Market Q Question 18.4: Price of Capital A decrease in the price of capital used in the production of cars: a) b) c) d) Will reduce the demand for car workers Will increase the demand for car workers May increase or decrease the demand for car workers Will decrease the price of cars but have no effect on the demand for car workers e) Will simply increase the demand for capital and thus have no effect on the price of cars Econ 101 Professor Burkhauser Question 18.5: Price of Labor a) b) c) d) e) An increase in the price of labor used to produced airplanes: will increase the price of airplanes, but will have no effect on the demand for capital used in airplane production will not affect the price of airplanes, but will decrease the demand for capital used in airplane production will increase the price of airplanes, and the demand for capital used in airplane production will not affect the price of airplanes, but will decrease the demand for capital used in airplane production will increase the price of airplanes, and may increase the demand for capital used in airplane production Econ 101 Professor Burkhauser Question 18.6: Child Labor a) b) c) d) e) Abolishing the ban on child labor in the U.S. would: increase the number of workers employed decrease the number of workers employed increase the demand for capital in the U.S. decrease the demand for capital in the U.S. increase the supply of capital in the U.S. Econ 101 Professor Burkhauser Question 18.7: Effect of Immigration Laws allowing greater immigration of Haitian refugees into the United States can be expected to: a) Lower wages in Haiti b) Lower wages in the United States c) Simply replace American workers with Haitians on a one to one basis d) Increase the demand for capital in the United States e) Increase the demand for capital in Haiti Econ 101 Professor Burkhauser Question 18.8: Price of Capital a) b) c) d) e) Workers employed in the beef industry would gain the most in the long run if the price of capital used to produce beef increased, regardless of the output and substitution effects decreased, regardless of the input and output substitution effects increased, if the output effect was greater than the substitution effect decreased, if the output effect was greater than the substitution effect decreased, if the output effect equaled the substitution effect Econ 101 Professor Burkhauser Question 18.9: Input Choice a) b) c) d) e) One machine is inferior to another in every technical respect. It follows that: The inferior machine will not be used The inferior machine is valueless The inferior machine may be used in the short run but never in the long run The inferior machine will only be used by inferior corporations Whether the inferior machine is used depends on the supply of superior machines Econ 101 Professor Burkhauser Question 18.10: Output and Substitution Effect a) b) c) d) e) An increase in the price of capital used in the production of textiles: Will increase the price of textiles but have no effect on the demand for textile workers. Will simply decrease the demand for capital and thus have no effect on the price of textiles. Will reduce the demand for textile workers. Will increase the demand for textile workers. May increase or decrease the demand for textile workers. Econ 101 Professor Burkhauser Question 18.11: Resistance to Technological Change A union is more willing to accept the introduction of new machines: a) The fewer the substitutes for the final product. b) The slower this technological change is occurring in the industry. c) The more elastic the supply of labor in the economy as a whole. d) The less elastic the demand for the industry's product. e) The less the substitutability of machines for workers in the production process. Econ 101 Professor Burkhauser Question 18.12: Resistance to Technological Change a) b) c) d) e) A union is more likely to fight the introduction of machines which are substitutes for workers: The faster technological change is occurring in the industry The more inelastic the supply of labor in the economy as a whole The less the substitutability of machines for workers in the production process The more elastic the demand for industry's product The more inelastic the demand for industry's product Econ 101 Professor Burkhauser Question 18.13: Increase in Labor Supply An increase in the supply of labor to the auto industry will, in the short run, increase the quantity of labor demanded the greater the elasticity of supply of automobiles the greater the inelasticity of supply of automobiles the greater the elasticity of demand for automobiles the greater the inelasticity of demand for automobiles the smaller is the share of labor in the production of automobiles Econ 101 Professor Burkhauser a) b) c) d) e) Question 18.14: Elasticity of Demand for Labor a) b) c) d) e) In most cases, the elasticity of demand for labor with respect to a change in wages will be: higher in the long run than in the short run. lower in the long run than in the short run. the same in the long run as in the short run higher in the long run if the supply of labor is more elastic higher in the long run if the supply of labor is less elastic Econ 101 Professor Burkhauser Question 18.15: Minimum Wage Increase An effective increase in the minimum wage: a) increases the demand for the products produced by minimum wage workers b) increases the quantity of minimum wage workers employed c) increases the demand for skilled labor d) decreases the demand for skilled labor e) may increase or decrease the demand for skilled labor Econ 101 Professor Burkhauser ...
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