slides_econ20a_labor_market

Labor demand lets start with some assumptions hold

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Unformatted text preview: d Let’s start with some assumptions ◮ hold capital stock fixed ◮ workers are all alike ◮ labor market is competitive ◮ firms maximize profits Firm Profit Maximization ◮ Mathematically, the firm’s problem is: max AF (N ) − wN N ◮ w is the real wage ◮ K is fixed just vary N ◮ ◮ This difference is maximized when the slope of the production function is equal to the real wage Deriving the Labor Demand Curve ◮ Analysis at the margin. ◮ ◮ ◮ ◮ A firm compares the costs and benefits of hiring one extra worker. If the real wage (w ) is greater than the marginal product of labor (MPN ), the firm is paying the marginal worker more than the worker produces, so a profit-maximizing firm will reduce the number workers to increase profits. If w < MPN , the marginal worker produces more than he or she is being paid, so a profit maximizing firm will increase the number of workers. The labor demand schedule specifies how many units of labor (such as man-hours) firms would hypothetically like to hire at any given prevailing wage. ◮ Labor demand schedule slopes downward. An outward shift in the labor demand curve means that firms wish to hire more workers than previously at every hypothetical wage level. Labor demand shifts out when ◮ A increases ◮ K increases Labor demand shifts in when ◮ A decreases ◮ K decreases Labor Supply - The Income-Leisure Tradeoff ◮ Supply of labor is determined by individuals ◮ Aggregate supply of labor is the sum of individuals’ labor supply ◮ Labor supply of individuals depends on labor-leisure choice ◮ Utility (or happiness) depends on consumption, c and leisure, l : Utility = U (c , l ) ◮ Need to compare the costs and benefits of working an additional day. ◮ ◮ Cost: loss of leisure time Benefit: more consumption, since income is higher ◮ If the benefits of working another day exceeds cost, work another day ◮ Keep working additional days until benefits exceed costs Labor Supply - The Income...
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