Chapter 3, Production Function
Q = A x F(K,N)
The Demand for Labour (Demand for & supply of labour)
Over a short period of time, the economies capital stock can be assumed as fixed. Unlike capital, labour
is flexible. The amount of labour employed changes fairly quickly.
- Microeconomic theoretical foundation for macroeconomic analysis
- Employment at the firm level, eg. We consider individual firm decision in hiring
o To earn the highest possible level of profit.
o Wages are determined in a competitive market (not set by firms)
o Workers (in any class) are all alike
Marginal product of Labour (MP ) Nnd Labour demand
MP ,NMeasures the contribution to the total output of an additional worker (in terms of extra output)
MP =N∆ total output
∆ # of workers
How many units of labour to hire?
- Compare MP to Neal wage (w)
- Marginal Revenue Product of Labour(MRP) = MP x P N X
- P X Price of output per unit
- W: nominal wage
- w: real wage w= W/P X
- General: real wage = nominal wage/Price Index (eg CPI)
Increase employment Decrease Employment
I. In real terms: MP >Nw MP W N MRP