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Please recall how TP, MP and
AP are plotted
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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
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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
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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
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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
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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)
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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
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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.
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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.
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Combined Effects
A wage decline will result to:
An Output EffectQ to Q
(short run)
A Substitution Effect - Q to Q
(long run)
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Isoquant-Isocost Analysis of
Long Run Labor Demand
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
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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
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Long Run Labor Demand
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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 -
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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)
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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