Lecture 4 Labor Demand PDF

Lecture 4 Labor Demand PDF - Labor Demand Econ 339 Labor...

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Labor Demand Econ 339 Labor Economics
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Labor Demand Why study Labor Demand? Together with LS determines wages Substitution of Capital for Labor Effects of market prices on Employment Note: Labor Demand is a derived Demand Derived from demand for product. We will study Short-Run Labor Demand Long-Run Labor Demand
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Short-Run Labor Demand Short Run => Capital Fixed Assume: Competitive product market Firm sells product at a constant price Competitive resource markets Firm treats resource prices as fixed What is the profit-maximizing level of employment for a firm with competitive product and resource markets?
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Short-Run Labor Demand What does the firm get out of employing one more unit of Labor? Firm produces more How much? Marginal product of Labor (MPE) It can sell the extra production at the constant market price (P) Value of marginal product of Labor (VMP E ) = Product Price*Marginal Product of Labor
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Remember: Marginal Product of Labor MP E Employment To obtain the VMP E we have to multiply the MP E by the price MP E
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Value of the Marginal Product of Labor VMP E Employment When multiplying the MPE-curve with the price the shape doesn’t change VMP E
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Profit-Maximizing Level of Employment How much does the firm have to pay for the extra unit of labor? The wage Assume: VMP E >wage Last unit of Labor increases profits Firm should hire as long as VMP E > wage Assume: VMP E <wage Last unit of Labor decreases profit Firm should not hire (fire) as long as VMP E <wage
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Profit-Maximizing Level of Employment This means the firm cannot increase profits when VMP E =wage ASIDE: Does this mean we have a second profit maximizing condition (other: P=MC)? NO! E TC F VC VC wage E wage MC qq q q M P Δ+ Δ Δ Δ == = = = ΔΔ Δ Δ E E wage M CP M P P w a ge MP =
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Profit-Maximizing Level of Employment At point A corresponding to employment level E* profits are maximized Why not point B? Firm will not operate to the left of the maximum of VMP E Wage VMP E Employment wage E * A B VMP E
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Different Wages Different wages will result in different levels of employment Wage VMP E Employment wage 2 E 2 * B B VMP E wage 3 C wage 1 A wage 4 D E 1 * E 3 * E 4 *
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Short-Run Labor Demand Curve The Short-Run Labor Demand Curve
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This note was uploaded on 11/17/2009 for the course ECON 339 taught by Professor Habermalz during the Spring '09 term at Northwestern.

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Lecture 4 Labor Demand PDF - Labor Demand Econ 339 Labor...

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