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Lecture 11

ECO101H1 Lecture Notes - Lecture 11: Labour Economics, Perfect Competition, Diminishing Returns


Department
Economics
Course Code
ECO101H1
Professor
Jack Carr
Lecture
11

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Factors of Production
Labour
Capital (equipment, structures)
Land
Our focus: labour (and wage rate/earnings)
TRUE or FALSE?
“The price of hockey tickets is high because the salaries of hockey players are so high.”
FALSE
Demand for a factor is a derived demand (from the market for the good it is used to produce)
Key concept: Value of Marginal Product (VMP)
VMP = Price (of good) * Marginal Product of factor
The Market for Widgets
Assumptions:
Firms are perfectly competitive, and the price of widgets is $5
Labour is the only variable factor of production (so the law of diminishing returns applies)
No. of Workers (TP) Total Product (MP) Marginal
Product (change
TP / change L)
(VMP) Value of
Marginal Product (P
* MP)
0 0 - -
1 50 50 $250
2 90 40 $200
3 120 30 $150
4 140 20 $100
Observations:
1. MP declines as number of workers increases (and thus)
2. VMP declines as number of workers increases
How many workers will the firm hire?
Insight:
Firm will not hire a worker unless VMP is at least equal to the wage rate
Example:
If wage rate is $299, firm will not hire the 3rd worker
If Wage = 200, firm hires 2 workers
= 150, firm hires 3 workers
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= 100, firm hires 4 workers
ó
VMP = Demand for Labour
1. Assume SSL is upward sloping
2. Shifts in DDL and SSL alter wage (W) and employment (N)
3. Equilibrium wage (W) is VMP of last worker hired
Applications (DD for labour = VMP)
What happens to:
(1) wage rate
(2) employment
of oil field workers in Alberta if there is an increase in the demand for oil?
1. World price of oil increases
2. VMP of oil workers ó demand for oil field workers; shifts to right (since P1 > P0)
3. Wage rate, employment of oil field workers both increases
True of False?
“The price of hockey tickets is high because the salaries of hockey players are so high.”
Insight
1. Hockey game is “product”
2. Hockey Players are “labour”
Result: salaries are high BECAUSE the demand for tickets is high
Further: the supply of hockey stars at any point in time is perfectly inelastic
(Note: if you doubled the salaries of hockey stars tomorrow, their number would be
unchanged)
Notes:
1. If demand for tickets is high, wage will be high
2. If demand for tickets is low, wage will be low
True or False?
“The price of single-family homes in Toronto is so high because the price of land is so high”
FALSE
The price of land is so high because the demand for homes is so high
Can a union increase both wages and employment?
(Observation: union wages are about 15% higher than non-union wages)
NO
DD for labour (=VMP) is downward-sloping
Impact of a Union
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