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Copyright © 2009 Pearson Education, Inc. 3- 1
Topic 2. Chapters 3 & 4
The Demand for Labor
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In the short run, a firm demand workers where
MRPL (marginal revenue product) = w (money wage)
MPL (marginal product) x P (price of output) = w
MPL = w/P (real wage)
in a competitive market.
A Competitive Firm’s Demand for Labor in the Short Run
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Supervisors Output (Q) MPL MRPL (P =$.50) w/P
0 1,000 --- --- ----
1 4,800
2 8,000
3 9,500
4 10,200
5 10,600
Example
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Supervisors Output (Q) MPL MRPL (P =$.50) w/P
0 1,000 --- --- ----
1 4,800 3,800 1,900
2 8,000 3,200 1,600
3 9,500 1,500 750
4 10,200 700 350
5 10,600 400 200
Example
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Table 3.2: Hypothetical Schedule of Marginal Revenue Productivity of
Labor for Store Detectives
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Figure 3.2: Demand for Labor in the Short Run (Money Wages)
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Figure 3.1: Demand for Labor in the Short Run (Real Wage)
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Figure 3.3: Effect of Increase in the Price of One Input (k) on Demand for Another Input (j),
where Inputs Are Substitutes in Production
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In the long run, a firm demand workers where
MPL / MPK = w/r
where w is wage and r is interest rate (price of capital)
*Why?
MPL x P = w (A)MPK x P = r (B) (A)/(B) MPL / MPK = w/r
A Competitive Firm’s Labor Demand in the Long Run
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Figure 3A.1: A Production Function
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Figure 3A.3: Cost Minimization in the Production of Q*
(Wage = $10 per Hour; Price of a Unit of Capital = $20)
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Figure 3A.4: Cost Minimization in the Production of Q*
(Wage = $20 per Hour; Price of a Unit of Capital = $20)
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Figure 3.4: The Market Demand Curve and Effects of an Employer-Financed
Payroll Tax
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Figure 4.1: Relative Demand Elasticities
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Figure 4.2: Different Elasticities along a Demand Curve
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Figure 4.3: Federal Minimum Wage Relative to Wages in Manufacturing,
1938-2007
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Figure 4.4: Minimum Wage Effects: Growing Demand Obscures Job Loss
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Figure 4.5: Minimum Wage Effects: Incomplete Coverage Causes
Employment Shifts