# Chapter 3 - Chapter 3 Labor Demand I Short Run and Long Run...

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Chapter 3 Labor Demand I Short Run and Long Run Labor Demand

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Introduction Firms hire workers because consumers want to purchase a variety of goods and services Demand for workers is derived from the wants and desires of consumers Central questions: how many workers are hired and what are they paid?
The Firm’s Production Function Describes the technology that the firm uses to produce goods and services The firm’s output is produced by any combination of capital and labor The marginal product of labor is the change in output resulting from hiring an additional worker, holding constant the quantities of other inputs The marginal product of capital is the change in output resulting from hiring one additional unit of capital, holding constant the quantities of other inputs

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More on the Production Function Marginal products of labor and capital are positive, so as more units of each are hired, output increases When firms hire more workers, total product rises The slope of the total product curve is the marginal product of labor Law of Diminishing Returns: eventually, the marginal product of labor declines Average Product: the amount of output produced by the typical worker
The Total Product, the Marginal Product, and the Average Product Curves 0 20 40 60 80 100 120 140 0 2 4 6 8 10 12 Number of Workers Output Total Product Curve 0 5 10 15 20 25 0 2 4 6 8 10 12 Number of Workers Average Product Marginal Product The total product curve gives the relationship between output and the number of workers hired by the firm (holding capital fixed). The marginal product curve gives the output produced by each additional worker, and the average product curve gives the output per worker.

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Profit Maximization Objective of the firm is to maximize profits The profit function is: Profits = pq – wE – rK Total Revenue = pq Total Costs = (wE + rk) Perfectly competitive firm cannot influence prices of output or inputs
Short Run Hiring Decision Value of Marginal Product (VMP) is the marginal product of labor times the dollar

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## This note was uploaded on 01/19/2012 for the course ECON 320 taught by Professor Shin during the Fall '08 term at University of Michigan.

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Chapter 3 - Chapter 3 Labor Demand I Short Run and Long Run...

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