Topic14 - Labour demand 14 Labour markets and income inequality Labour supply Equilibrium in the labour market The market supply of a

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1 14. Labour markets and income inequality Labour demand ± The demand for a resource (labour) is derived from the demand for the product the resource (labour) produces, called ‘derived demand’. ± The demand for an additional unit of labour will occur as long as the marginal revenue generated by each additional unit exceeds the marginal cost. Labour supply ± The market supply of a resource (labour) sums all the individual supply curves for the resource. ± A resource (labour) owner will supply additional units of the resource (labour) as long as doing so increases his or her utility. Equilibrium in the labour market ± Firms demand the resources that maximise profit, and households supply the resources that maximise utility. ± Equilibrium price for a resource (i.e., labour) occurs at the point where the market demand curve for the resource intersects the market supply curve. Labour market for carpenters Dollars per hour of labour W 0 E Hours of labour per period D S Labour supply and utility maximisation ± This is how individuals choose to use their scarce resources to produce, exchange, and consume products in an attempt to satisfy their unlimited wants. ± Utility is derived from two sources ² the consumption of goods and services ² the enjoyment of leisure.
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2 Three uses of time ± market work ² time sold as labour in return for a money wage ± non-market work ² time spent producing goods and services in the home or acquiring an education ± leisure ² time spent on non-work activities. A utility-maximising consumer/worker ± A utility-maximising consumer maximises utility by allocating time so that the expected marginal utility of the last unit of time spent in each activity is identical. ± The utility maximising framework gives rise to the labour supply curve. Substitution and income effects ± substitution effect ² As wages increase, workers substitute market work for other activities. ± income effect ² A higher wage means a higher income for the same number of hours, and a higher income means that workers demand more leisure; this explains the backward-bending supply curve of labour. Individual labour supply curve Hours of labour per week 0 S 7 20 8 30 9 40 10 48 13 11 55 12 60 Wage rate $14 Deriving the market labour supply curve Wage rates (a) Individual A s A 0 Labour (b) Individual B 0 s B (c) Individual C 0 s C (d) Market supply 0 S Non-wage determinants of labour supply ± Other sources of income ± Non-monetary factors in general ± Job amenities ± The value of job experience ± Taste for work
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3 Labour demand ± ‘Value of Marginal Product’ (VMP) is the change in total revenue when an additional unit of labour is hired, other things held constant.
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This note was uploaded on 08/29/2011 for the course ECON 1101 taught by Professor Janegoley during the Three '08 term at Australian National University.

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Topic14 - Labour demand 14 Labour markets and income inequality Labour supply Equilibrium in the labour market The market supply of a

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