101 Class 20 W2008 - Principles of Economics I Economics...

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Unformatted text preview: Principles of Economics I Economics 101 Section 400 Announcements Readings Chapter 10: Production, Technology and Costs Chapter 16: Markets for Labor and other Factors of Production Assignment Available this afternoon on CTools Last Quiz in section this week 4/26/2008 2 output/ unit of L Demand for Labor $/unit of L W W Labor Demand P*MPL = MRPL MPL L* 4/26/2008 L* L 3 Demand for Labor The MRPL curve is the Labor Demand curve Diminishing marginal productivity implies demand curve is downward sloping Ensures unique value of L at which MRPL = W That value of L is the amount of labor optimally employed 4/26/2008 4 Labor Demand Revisited An Example Suppose firm hires L* units of labor: MPL = 10 P = $5 W = $50 MPL*P = 10 * $5 = $50 = W i.e. this is the optimal amount of labor to employ What if P = $500 and W = $5000? MPL * P = 10 * $500 = $5000 = W 4/26/2008 i.e. L* is still the optimal amount of labor to employ 5 Labor Demand Revisited Labor demand depends on the wage relative to the price of output: P * MPL = W MPL = W/P W/P = the real wage Measures the amount of output that must be paid to the marginal worker 4/26/2008 6 Determinants of Quantity of Labor Demanded Wages Price of output Higher wages will reduce labor employed Higher output prices encourage higher employment Technology 4/26/2008 Improved productivity of labor will encourage increased employment 7 Determinants of Quantity of Labor Demanded Other inputs used Increased use of some factors will increase the productivity of labor Increased use of some factors will decrease the productivity of labor Increased capital stock will often imply increased labor demand E.g.production line E.g. if similar tasks can be accomplished by skilled and unskilled workers, an increase in number of skilled workers employed will reduce the marginal productivity of unskilled workers Prices of other inputs used will also be relevant 4/26/2008 8 A Two Input Model Production uses labor (L) and capital (K) Price of labor = W (wage) Price of capital = R (rental rate) Production function: Q = f(K, L) 4/26/2008 Implied tradeoff between K and L Different combinations of K and L generate the same level of output 9 A Two Input Model Optimal labor usage: Optimal capital usage: MPL = W/P or P = W/MPL W/MPL = number of dollars required to increase output by 1 unit (using labor) MPK = R/P or P = R/MPK R/MPK = number of dollars required to increase output by 1 unit (using capital) Profit maximization implies: 4/26/2008 W/MPL = R/MPK or W/R = MPL/MPK 10 Example: There’s more than one good way to skin a cat Capital Intensive Used if capital is relatively inexpensive Townsend 7941 Automatic Skinning Machine 4/26/2008 11 Example: There’s more than one good way to skin a cat More labor intensive Used if capital (i.e. skinning machine) is relatively expensive On the hunt! 4/26/2008 12 Example: There’s more than one good way to skin a cat Most labor intensive Used when capital (i.e. skinning machetes) is very expensive 4/26/2008 13 Example: Light bulb manufacturing GE owns light bulb plants around the world, including: Plants have access to the same technology Austintown, Ohio Budapest, Hungary (Tungsram, purchased in 1989) Owned by the same firm Plants do not look similar 4/26/2008 Hungarian plant looks like something out of the 1950s Why? 14 Example: Light bulb manufacturing Prod. in Hungary is relatively labor intensive if labor is relatively inexpensive Minimum Wages In Ohio - $7/hour In Hungary - HUF 69,000 per month Approx $1020/month (160 hours/month) Approx $420/month (at current ex. rate) If costs of capital are similar then labor is relatively inexpensive 4/26/2008 15 Assessing the costs of capital Cost of capital is usually associated with the rental price Capital owners forgo the rental price in any given period if they use the capital (opportunity cost) Varies between locations based on trade/transactions distortions Also depends on the costs of financing “Cost of capital” in a given environment usually refers to the cost of raising funds e.g. selling bonds requires a promise to make interest payments Also depends on relative tax treatment 4/26/2008 E.g. depreciation allowances lower costs of capital 16 Question Suppose Hungary joins the EMU in 2009, and wages soon rise to equal US wages Are we likely to see Hungary manufacturing as capital intensively as the US? Depends on the relative costs of capital The location with the lower cost of capital will display higher capital intensity 4/26/2008 17 Factor Demand and Output Supply For a two input model, optimal values of L and K are associated with: Once we know the optimal values of K and L (call them K* and L*), we also know output: MPL = W/P and MPK = R/P Q = f(L*, K*) Therefore, the input choice also provides insight into the supply decision 4/26/2008 18 Factor Demand and Output Supply If Then MPL = W/P and MPK = R/P W/MPL = P = R/MPK W = extra $ spent/extra unit of labor MPL = extra output / extra unit of labor W/MPL = extra $ / extra unit of output = marginal production cost (when using only L) R/MPK = extra $ /extra unit of output = marginal production cost (when using only K) 4/26/2008 19 Example Suppose K and L inputs are chosen so that Then hiring the extra unit of L creates 10 units of output and costs $100 At the margin, the extra units of output cost $10 each (W/MPL = $10) Hiring the extra unit of K creates 20 units of output and costs $200 MPL = 10 and MPK = 20 Given W = $100, R = $200 At the margin, the extra units of output cost $10 each (R/MPK = $10) Regardless of HOW the extra units are produced, MC = $10 Is output the efficient level? Depends on P 4/26/2008 If P > $10, increase output If P < $10, reduce output If P = $10, profits are maximized (i.e. P = MC) 20 Marginal Cost Characterized in two ways: Marginal Opportunity Cost Marginal Production Cost Value of other goods forgone when using resources to produce the marginal unit Dollar cost of purchasing resources required to complete the production These concepts are equivalent when factor markets are competitive 4/26/2008 Prices of purchased resources are equal to the value of the alternative goods they could have been used to produce 21 ...
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This note was uploaded on 04/01/2008 for the course ECON 101 taught by Professor Gerson during the Winter '08 term at University of Michigan.

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