Econ1102_Week_3 - Week 3 Lectures 4 & 5 Unemployment and...

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Week 3 Lectures 4 & 5 Unemployment and the Labour Market Reference: Bernanke, Olekalns and Frank - Chapter 5 Key Issues Demand for labour Supply and demand model of the labour market Types of unemployment Impediments to full employment
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2 Demand for Labour Marginal Product of Labour (Table 5.1 (Textbook Chapter 5)) A firm combines workers with a given amount of capital (machines and buildings) to produce computers. As the firm employs more labour its output rises. But we can look at the additional output that is generated by each additional worker. This is the marginal product of labour.
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3 Banana Computer Company No. of Output Marginal Value of MP Workers (computers) Product ($3000/com) 0 0 - - 1 25 25 $75,000 2 48 23 69,000 3 69 21 63,000 4 88 19 57,000 5 105 17 51,000 6 120 15 45,000 7 133 13 39,000 8 144 11 33,000
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4 Production Function 0 20 40 60 80 100 120 140 160 0123456789 No of Workers Total Product
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5 Marginal Product of Labour 0 5 10 15 20 25 30 0123456789 No. of Workers Marginal Product of Labour
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6 Value of Marginal Product 0 10000 20000 30000 40000 50000 60000 70000 80000 0123456789 No. of Workers Value of MPL ($)
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7 Diminishing marginal product The nature of the production technology is such that each additional worker produces less output than the existing workers. Common assumption in economics Notation: Marginal Product of Labour = MPL = L Y Δ Δ Value of Marginal Product = Price×MPL
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8 Firm’s Demand for Labour In deciding the number of workers to employ a firm will compare the benefit of an additional worker with the cost of that worker. Benefit to the firm of employing an additional worker Value of Marginal Product = P×MPL Cost to the firm of employing an additional worker Wage = W
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9 Competitive Markets Assume that firm operates in a competitive market It cannot set the wage it pays workers It cannot set the price it receives for its product Firm ( i ) will be willing to employ labour until: i i i W MPL P = × Value of MPL = money wage or i i i P W MPL = Marginal product of labour = real wage
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10 Fundamental Point Since the MPL decreases as the firm employs more workers, it must be the case that the real wage also has to fall ( as more workers are employed ) This implies that a firm’s demand for labour is a decreasing function of the real wage.
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This note was uploaded on 09/16/2011 for the course ACCT 1501 taught by Professor Helen during the Three '09 term at University of New South Wales.

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Econ1102_Week_3 - Week 3 Lectures 4 & 5 Unemployment and...

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