04+Aggregate+Production+and+Productivity%2C+Part+2

04 Aggregate Product - Agenda 1 Factor Prices Aggregate Production and Productivity Part 2 2 The Demand for Labor 3 The Supply of Labor 4 Labor

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1 4-1 Aggregate Production and Productivity, Part 2 4-2 Agenda 1. Factor Prices 2. The Demand for Labor 3. The Supply of Labor 4. Labor Market Equilibrium 5. Full-Employment Output 4-3 Determination of Factor Prices To calculate factor prices, the demand for and supply of each factor of production must be determined. 4-4 Determination of Factor Prices Assumptions: 1. The labor market is competitive. 2. Workers are homogeneous. 3. The capital stock fixed. 4. Firms maximize profits. 5. Individuals maximize utility.
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2 4-5 The Demand for Labor The demand for labor depends on: 1. The costs of hiring additional workers VERSUS 1. The benefits of hiring additional workers. 4-6 The Demand for Labor • What is the cost of hiring one more worker? – The marginal cost of hiring one more worker is the nominal wage: W – or, in real terms, w = W/P 4-7 Marginal Cost of Hiring an Extra Worker w L 4-8 The Demand for Labor • What is the benefit of hiring one more worker? – The benefit of hiring one more worker is the marginal revenue product of labor: MRPL = P * MPL – or, in real terms, MPL
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4-9 Marginal Benefit of Hiring an Extra Worker MPL L 4-10 The Demand for Labor – A profit-maximizing firm will hire additional workers until the marginal revenue product of labor equals the nominal wage: W = MRPL = P * MPL – or, in real terms, w = MPL 4-11 The Demand for Labor • The costs and benefits of hiring extra workers: If w > MPL , profits will increase if the number of workers declines . If w
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This note was uploaded on 10/18/2011 for the course ECON 100B taught by Professor Wood during the Fall '08 term at University of California, Berkeley.

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04 Aggregate Product - Agenda 1 Factor Prices Aggregate Production and Productivity Part 2 2 The Demand for Labor 3 The Supply of Labor 4 Labor

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