Labor Demand 2

Labor Demand 2 - LECTURE 7 LABOR DEMAND 2 Introduction to...

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LECTURE 7 LABOR DEMAND 2 Introduction to Labor Economics Economics 440 Prof. Brown
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OUTLINE Long-run labor demand model Labor demand case study: American Jobs Act Scale and substitution effects Perfect Complements Perfect Substitutes Skill-biased Technological Change
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FIRM’S OBJECTIVE FUNCTION Maximize profit: ࣊ൌ࢖ൈࢗെ࢘ൈࡷെ࢝ൈࡱ
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MAXIMIZING PROFIT IN THE SHORT RUN The E that maximizes profit in the short run One caveat: Holds if VMP of labor is decreasing w E VMP E
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ALTERNATIVE WAY TO THINK ABOUT SR DEMAND FOR LABOR q p MC To maximize profit: MC=p p M q*
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ALTERNATIVE WAY TO THINK ABOUT SR DEMAND Firm’s profit maximizing condition: ࡹ࡯ ൌ ࢖ In the short run K is fixed, so the MC of production is just the labor cost of producing one more unit. →ࡹ࡯ൌ ࡹࡼ Rewriting the firm’s profit maximizing condition: ࡹࡼ ൌ࢖→࢝ൌ࢖ൈࡹࡼ ࢂࡹࡼ ൌ࢝
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SR LABOR DEMAND = VMP OF LABOR E w VMP E An decrease in w results in an unambiguous increase in E hired.
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LONG RUN HIRING DECISION Same objective function: ࣊ൌ࢖ൈࢗെ࢘ൈࡷെ࢝ൈࡱ p, r, w are still fixed b/c perfectly competitive input and output markets But K is no longer constant – removes constraint Firm has two choice variables – K and E
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LONG RUN HIRING DECISION Firm is able to choose K and E *Adjust to the prices of K, E, and to p. Examine production (generates revenue) and Costs
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LONG RUN In the LR the firm can adjust both Labor and Capital. We can think of the Firm’s profit maximization problem as a two step problem: 1. Determine the cost minimizing quantities of E and K to produce each possible q. 2. Choose the q that maximizes profit by setting p=MC (thus determining E and K).
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PRODUCTION: ISOQUANT There are many ways to make a given q.
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Labor Demand 2 - LECTURE 7 LABOR DEMAND 2 Introduction to...

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