Short Run and Long Run Demand for Labor (1)

8/11/2019 Short Run and Long Run Demand for Labor (1)

1/18


2/18

Please recall how TP, MP and

AP are plotted


3/18


4/18

The Marginal Wage Cost

(MWC)

Units of

Labor

TP MP Product

Price

TR MRP

(TR/L)

VMP

(MP x P)

4

5

6

7

8

9

15

27

36

42

45

46

12

9

6

3

1

2

2

2

2

2

2

30

54

72

84

90

92

24

18

12

6

2

24

18

12

6

2

The increase in total wage cost resulting from the employmentof one more labor unit.

RECALL: VMP = w ----------the marginal gain from hiring an additional worker

equals the cost of that hire

VMP = MRP rule: MRP = MWC

MWC = wThus, the short run labor demand curve was derived from VMP and MRP curve


5/18

The Equality of VMP and MRP

in Perfectly Competitive

Markets Since in PC markets, price is constant, thus P = MR

MRP (MR x MP) the extra revenue to the firm from employing an

additional unit of labor= VMP (P x MP) the social value of the extra

unit of output

Units of

Labor

TP MP Product

Price

TR MRP

(TR/L)

VMP

(MP x P)

4

5

6

7

8

9

15

27

36

42

45

46

12

9

6

3

1

2

2

2

2

2

2

30

54

72

84

90

92

24

18

12

6

2

24

18

12

6

2


6/18

Short Run Labor Demand:

Imperfectly Competitive

MarketsUnits of

Labor

TP MP Product

Price

TR MRP VMP

4

56

7

8

9

15

2736

42

45

46

129

6

3

1

2.60

2.402.20

2.10

2.00

1.90

39.00

64.8079.20

88.20

90.00

87.40

25.8014.40

9.00

1.80

-2.60

28.8019.80

12.60

6.00

1.90

Has some degree of monopol is t ic /market pow er

RECALL IN MICROECONOMICS: In IC markets, P is not equal to MR, thus,

MR < P, thus, MRP < VMPMRP declines because of

DIMINISHING MARGINAL PRODUCT and

PRICE DECLINES AS OUTPUT INCREASES


7/18

Short Run Labor Demand:

Imperfectly Competitive

MarketsUnits of

Labor

TP MP Product

Price

TR MRP VMP

4

56

7

8

9

15

2736

42

45

46

129

6

3

1

2.60

2.402.20

2.10

2.00

1.90

39.00

64.8079.20

88.20

90.00

87.40

25.8014.40

9.00

1.80

-2.60

28.8019.80

12.60

6.00

1.90

Notice the value of the added output from societys perspective. (VMP)

But the MRP of the 5thworker is only 25.80. Why is there a 3.00 difference?

= 28.80

(15 x 0.20)

To sell the 12,

There must be a 0.20 cut


8/18

Plot the short run labor demand

curve for the imperfectly competitiveseller using the MRP = W rule

IC firm restricts output in the market becauseit will be more profitable to produce lessoutput, thus, will employ less workers.

Therefore, IC firm will be less responsive to

wage rate changes than a PC seller.NOTE: VMP is not equal to MRP thus,

(MRP = MR x MP) < (VMP = P x MP)


9/18

Long Run Labor Demand

q = f( E, K)

Schedule or curve indicating the amount

of labor that firms employ at each

possible wage rate when both labor and

capital are variable


10/18

Output Effect or Scale Effect

Change in employment resulting solely

from the effect of a wage change on the

employers cost of production.

Illustrate the effect of a decline in wagerate using Marginal Cost curve and

Marginal Revenue curve of a PC firm.


11/18

Substitution Effect

Change in the employment resulting

solely from a change in the relative price

of labor, output being held constant.

A firm responds to a wage decline bysubstituting the relatively less expensive

labor for some types of capital. Thus,

long run demand for labor is moreelastic than short run.


12/18

Combined Effects

A wage decline will result to:

An Output EffectQ to Q

(short run)

A Substitution Effect - Q to Q

(long run)


13/18

Isoquant-Isocost Analysis of


Isoquant

Downward slope

Convexity to the origin (MRTS=K/L)

Higher output to the northeast

Isocost

Plabor/Pcapital Least cost combination of K and L

MRTS = PL/PK


14/18

Deriving the Long Run Labor DemandRecall:

I = 120

Plabor =4Pcapital = 6

optimal level = 15What if price of labor increased

to 12?

a-b ----SEb-c ---- OE


15/18



16/18

Elasticity of Labor Demand

The sensitivity of the quantity of labor

demanded to wage rate changes (wage

elasticity coefficient)

Ed = %Qd for labo r /% in wage rate

Elastic - >1; employers are responsive to

wage changes

Inelastic -


17/18

Total Wage Bill Rules

Total Wage Bill = W x Qlabor

RECALL effect of elasticity to TR

e.g. price and demand is elastic TR

Thus, if labor demand is elastic,

wage will total wage bill (increases thewage bill but creates a decline inemployment)


18/18

Seatwork crosswise

Determinants of elasticity: Explain how the following affectelasticity of labor demand:

1. Elasticity of product demand

2. Ratio of labor costs to total costs

3. Substitutability of other inputs (capital)

4. Supply elasticity of other inputs Determinants of Labor: Illustrate the effect of the following to

labor demand, ceteris paribus:

1. Increase in product demand

2. Increase in marginal product of labor (productivity)

3. Decrease in the number of employers

4. The price of capital increased and it is a gross substitute forlabor

5. The price of capital decreased and it is a gross complementof labor

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Short Run and Long Run Demand for Labor (1)

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