IE 17_ Factor Market-Labor.pdf - Page 1 of 8 Class Notes – Labor Markets Labor Markets Let us now look at the markets for factors of production and in

IE 17_ Factor Market-Labor.pdf - Page 1 of 8 Class Notes...

This preview shows page 1 - 3 out of 8 pages.

Page 1 of 8 Class Notes Labor Markets 4/22/2019 7:35 PM Labor Markets Let us now look at the markets for factors of production, and in particular those for L and K. Labor markets: x We have so far looked at the demand for labor as being the byproduct of the firm’s setting its profit-maximizing output. o E.g., once the firm has set output by setting MC = MR (or P) we work backwards through the SR or LR production function to find the level of L required. o Since SRMC and LRMC depend upon K & w, or v & w respectively, we can vary w and see the impact on q, and thus on L. o But, is there an easier way? x The decision to hire. o Firms will hire an additional unit of a factor of production as long as the extra revenue generated by the increased production due to the extra factor exceeds the marginal cost of the factor. The calculus of the MRP L = ME L condition. Maximize Π = TR − TC with respect to L (as opposed to q as we have been doing ‘til now), holding K constant, I.e., in the short -run. ∂Π ∂L = ∂TR ∂L ∂TC ∂L = MRP L − ME L = 0 The MRP L x MRP L ∂R ∂L = ∂R ∂q ∂q ∂L , the chain rule. x Thus, MRP L = MR q ∗ MP L the extra production due to one more unit of work (MP L ) * marginal revenue generated by that production (MR q ). x MP L holding all other factors (K) constant. o We’ve looked at this before. o MP L = ∂q ∂L o Diminishing marginal products. o Shifts in the MP L curve with changes in the amounts of other factors, up and down. x MR q o For the price-taking firm, MR = P. o For the price-setting firm, MR < P. x So, MRP L slopes downward for at least one, and perhaps two reasons. o Therefore, the MRP L of the price-setting firm would be below that of the price-taking firm. x The MVP L . The MRP L when MR = P. maximizing TL
Image of page 1

Subscribe to view the full document.

Page 2 of 8 Class Notes Labor Markets 4/22/2019 7:35 PM ME L (or MFC L ) x We’ve seen ME in our discussion of monopsony. Here ME L = ∂(wL) ∂L = w + ∂w ∂L L x For the moment , we’ll look at the wage-taking firm. o ∂w ∂L = 0 o ME L = w o Analogous to the price-taking firm. o Thus the MRP L curve i s the firm’s demand curve for labor. The MRP L curve answers the question: what is the quantity of labor hired by the firm at any given wage. It is where MRP L = wage. This is the other side of the production decision and, since this side results in maximized profits too, it must yield the same answers as the production decision. Shifters x Changes in K (or other factors), i.e. in the MP L . x Changes in the price of (or deman d for) the firm’s output, i.e., in the MR q . NOTE that we can thus derive the supply curve of the firm from the firm’s demand for labor as a function of P.
Image of page 2
Image of page 3

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes