- Perfectly competitive (buyers and sellers are price takers).
- Firm has no control over wage
- Profit from a worker
o Revenue minus the worker’s wage
- A worker’s contribution
o Their Marginal Product times the selling price of the good, P.
o This is the value of marginal product of labour, VMPL. Also called Marginal Revenue
o VMPL = P * MP
- Firms choose the quantity of labour corresponding to where Wage = VMPL.
Shift Factors for Labour Demand
1. Changes in price of goods.
a. If P increases, D increases and curve shifts right
b. If P decreases, D decreases and curve shifts left.
2. Changes in supply of other factors
3. Technological Change
a. Advances that increase the MP of labour shift the curve to the right
Supply in Labour Market
- Upward sloping
- The opportunity cost of leisure is an hour’s wage
Shift Factors for Labour Supply
1. Change in attitudes
2. Changes in alternative opportunities
Equilibrium Price of Labour
Equilibrium price happens when labour demand = labour supply.
Prices of Land and Capital
- Rental price is what a person pays to use a factor of production for a limited period of time.
- r = rental price of capital
- K = amount of capital
- P = selling price of good
- Compensational A difference in wages that arises from non- Ex.
Differential monetary characteristics of different jobs. Coal workers – dirty and dangerous
Night shift workers
Doctors who hold people’s lives in