SECTION VIII OUTLINE

SECTION VIII OUTLINE - I. SECTION VIII THE LABOR MARKET a....

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I. SECTION VIII – THE LABOR MARKET a. Profit Maximization in Labor Markets i. Any firm – whether competitive in the labor market or not – should continue to hire labor so long as the increase in revenue obtained from selling one more worker’s product exceeds the increase in labor cost caused by hiring him 1. The increase in revenue obtained is termed the marginal revenue product of labor 2. The increase in total cost caused by hiring one more laborer is termed the marginal factor cost of labor ii. Only when the Marginal revenue product of labor equals the marginal factor cost does profit maximizing firm cease hiring b. Competitive Labor Markets i. Marginal Physical Product of Labor measures the change in totally physical product brought about by hiring an added worker ii. Hiring additional workers causes output to rise by less than the previous one causeing MPP to diminish 1. This is because each additional worker has a smaller amount of the fixed factor, capital, to work with and because the existing workers start to crowd and interfere with each other iii. The Marginal Revenue Product of Labor measures the change in revenue obtained by hiring another worker and selling the resulting increase in output iv. W=MFC=MRP is the profit maximizing condition v. Since the demand for labor depends upon the product price, it is often called a derived demand vi. Changes in the quantities of other factors of production or the technology will also change the MPP relation and therefore the labor demand vii. Because an industry’s output expands as employment rises, product price normally falls, thereby affecting the price component in the marginal revenue product of labor c. Relative Wages and Exploitation
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This note was uploaded on 04/10/2008 for the course ECON 1 taught by Professor Bergstrom during the Fall '07 term at UCSB.

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SECTION VIII OUTLINE - I. SECTION VIII THE LABOR MARKET a....

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