ECO1010 Course Summary.pptx

Between points a and b the se ie at point b r50 x

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Between points A and B, the SE > IE At point B: R50 x 45hours = 2250 Between points B and C the IE > SE At point C: 70 x 40 = 2800
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Assumptions for perfectly competitive Labour Market Large number of buyers (employers) and Large number of sellers (employees). All participants become wage takers Labour must be identical (All workers must have identical skills, no reason for employer to prefer one worker over another) Freedom of entry and exit (workers are completely mobile, can move easily between employers) Perfect competition in the goods market
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W QL TCL MCL ACL 6 1 6 6 6 6 2 12 6 6 6 3 18 6 6 6 4 24 6 6 Notice P L =W=AC L =MC L =S
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The demand for labour We will start by looking at the demand for labour in the short run . We will further assume that the market is perfectly competitive over its output . We assumed that firms used some amount of capital and labour in order to produce output, and in the short run we assumed that capital was fixed. So, the question is now what level of labour the firm should hire in order to meet its demands on output.
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The short run demand for labour As an economist, you should be thinking about how to hire labour in the following way: “I will only hire an extra labourer if the amount of benefit that they give me outweighs their cost to me.” In deciding whether to employ a worker, a firm will compare the marginal benefit from hiring a worker against the marginal cost. If the marginal benefit is greater than the marginal cost, the firm will hire that worker But lets elaborate on this Marginal Benefit We know that each extra labourer we hire will have some level of marginal product. But the actual benefit of hiring the extra labourer will be the amount that the firm can sell that extra product for. In other words, the benefit is the value of the marginal product of labour . There are two components when employing an additional worker. Physical product of labour Marginal revenue
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Marginal revenue product of labour Considering Marginal Benefit There are two components when employing an additional worker. Physical product of labour Marginal revenue We thus define a concept of marginal revenue product of labour to be the amount by which total revenue increases when an extra unit of labour is hired . MRP = MP x MR For a perfectively competitive firm, MR = P So MRP for Perfect competition = MP x P
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Labour Market: Firms Demand for labour = MRP QL TP MP P=MR MRP 1 10 10 50 500 2 18 8 50 400 3 24 6 50 300 4 28 4 50 200 MRP = MP x MR For a perfectively competitive firm, MR = P So MRP for Perfect competition = MP x P
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Labour Market QL TP MP P=MR MRP 1 10 10 50 500 2 18 8 50 400 3 24 6 50 300 4 28 4 50 200 Notice that with the assumptions made, MRP decreases Why?? Because MP decreases (Think back to production chapter, we assumed diminishing returns) P stays the same
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The hiring rule How much labour should the firm ? If MRP L > MC L , then the next labourer will add more to total revenue than they cost, so it makes sense to hire them.
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Christopher Reinemann
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