✤ So far: production functions and labour market▯
✤ Focus: Factor prices in the labour market▯
✤ Labour market = demand and supply of market, and labour market equilibrium▯
✤ Everything about labour market also applies to capital goods because as we talk
about factor prices, we are actually saying what are the prices of the factor of
production - doesn’t matter if it is labour or capital or any other factor of production▯
✤ Factors of production = capital, labour▯
✤ Assumptions: ▯
1. Labour markets are competitive (competitive = wages set by the point where
supply and demand intersect) ▯
2. All workers (labour) are homogenous 3. ▯
3. Capital stock is fixed (SR) 4. ▯
4. Firms are attempting to max profits and individuals/consumers are attempting
maximize their utility▯
✤ Demand for labour = think from the perspective of a business (how would you make
a decision about hiring more workers or laying off some workers?) = what are the
cost associated by hiring a worker, compare that with the benefit with hiring
additional workers▯
✤ Cost of hiring a worker marginal worker) = nominal wage rate (W) (what we are
paying the worker wage + benefits - total labour compensation cost associated with
the worker)▯
✤ Real Wage Rate (w) = Nominal Wage Rate (W) / General Price Level = Purchasing
power of that wage rate▯
✤ How would we graph this marginal cost of hiring this worker?▯
✤ y-axis = real wage rate (w)▯
✤ x-axis = number of workers▯
✤ Remember: assumption that #4 = any one firm, whether I hire a worker or not hire a
worker is not going to affect the wage rate▯
✤ Marginal Cost of hiring the next worker is independent of the size of the labour
market▯
✤ Benefits of hiring a new worker = a new worker is going to be able to produce
additional output which will create revenue for the company▯
✤ What is the revenue that the additional worker is going to bring in? = value of the
marginal product of labour = marginal revenue product of labour = price we can sell
our product at (general price level) * marginal product of labour = total revenue▯
✤ marginal revenue / price level = marginal product of labour (what the benefit to the
firm is of hiring a new worker)▯
✤ It is easy to determine what the MP of Labour is▯
✤ As we increase employment, output grow at a slow rate = marginal product of
labour is downward sloping = diminishing MP = gives us the benefit of hiring more
labour▯
✤ If we have a lot of workers, as we add more, the incremental (marginal) benefit is
going to be much lower and vice versa▯
✤ What is a profit maximizing firm going to do? Set the nominal wage = value of the
MP of labour => real wage = MP of labour▯
✤ We want to hire workers upto the point where marginal benefit = marginal cost▯ ✤ Beyond that, we want to get rid of the additional works, until we reach the mb = mc
again▯
✤ MC > benefit => reduce workers to increase profits▯
✤ benefit > MC => hire workers to increase profits▯
✤ MC = benefit => real wage = MP => max profit▯
✤ ▯
✤ We are on the MP of labour curve **▯
✤ Labour demand curve = relationship between real wage and quantity of labour
demanded▯
✤ EQLM condition = we want to be where real wage = MP of labour▯
✤ To be at EQLM, move along the demand curve of labour▯
✤ MP of labour curve = demand for labour curve▯
✤ What can cause the demand of labour curve to move? = MP of labour = what
changes the production function = 1. change in the capital stock, 2. supply or
technology or productivity shock▯
✤ Supply of labour = supplied by workers who individuals/consumers who wish to
maximize their utility = think about how individuals determine how much to supply to
the market based on the current real wage▯
✤ Involves determining the cost associated with working and benefits associated with
working▯
✤ Think about = what happens when real wage increases▯
✤ = substitution effect = the return for working more hours has increased, work more,
substituting out of non-work time into more work time = incentive to work more =
SUPPLY of labour has increased▯
✤ = income effect = we are consuming a bundle of goods and services, and one of
those goods includes non-working time = i could work the same number of hours as
before and my income can go up, and now i can consume more, and i don’t have
work more either = SUPPLY
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