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
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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