Labor Demand and Labor Supply

Labor Demand and Labor Supply - The Production Function...

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The Production Function • Supply or productivity shocks – Supply shock = productivity shock = a change (shift) in an economy’s production function – Supply shocks affect the amount of output that can be produced for a given amount of inputs – Shocks may be positive (increasing output) or negative (decreasing output) – Examples: weather, inventions and innovations, government regulations, oil prices The Production Function • Supply shocks – Supply shocks shift graph of production function (see next figure) • Negative (adverse) shock: Usually slope of production function decreases at each level of input (for example, if shock causes parameter A to decline) • Positive shock: Usually slope of production function increases at each level of output (for example, if parameter A increases) An adverse supply shock that lowers the MPL Labor, L
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The Demand for Labor • How much labor do firms want to use? – Assumptions • Hold capital stock fixed—short-run analysis • Workers are all alike • Labor market is competitive • Firms maximize profits The Demand for Labor • The marginal product of labor and the labor demand curve – Labor demand curve shows relationship between the real wage rate and the quantity of labor demanded – It is the same as the
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This note was uploaded on 02/22/2011 for the course ECON 305 taught by Professor Terrell during the Fall '08 term at Maryland.

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Labor Demand and Labor Supply - The Production Function...

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