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Unformatted text preview: Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]. 1 1 Supply of Labor 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen December 3, 2007 Lecture 31 Factor Market Outline 1. Chap 14: Supply of Labor 2. Chap 14: Demand of Labor 1 Supply of Labor We derive the supply of labor by solving consumers utility maximization prob- lems. Two variables determining the utility are leisure ( L ), which is measured by hours, and income ( Y ); the prices are w and 1 respectively. To maximize u ( L,Y ), we have u L = w. u Y If w increases, on one hand, higher wages encourage people to work more (point A to point B ), which is a substitution effect; on the other hand, higher wages allow the worker to purchase more goods, including leisure, which reduces work hours (point B to point C ), which is an income effect (see Figure 1). When the wage is higher, if the substitution effect exceeds the income effect, labor supply increases, and leisure decreases; if the income effect exceeds the substitution effect, labor supply decreases, and leisure increases (see Figure 2). Like product markets, competitive, monopolistic, and monopsonistic mar- kets are types of factor markets. In a competitive factor market, if the product market is also competitive, MRP L = P MP L . If the product market is monopolistic, 1 MRP L = MR MP L = P (1 ) MP L ....
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This note was uploaded on 11/18/2011 for the course ECON 14.01 taught by Professor Pindyck during the Fall '08 term at MIT.
- Fall '08