Chapter 4 Demand for Labor in Short Run.ppt

Chapter 4: Demand for Labor in Short Run Demand for labor: level of employment (L) desired by business firms. Topics: Factors that determine a firm’s optimal level of employment; How this optimal level responds to changes in wages, cost of capital, firm’s sales, and technology changes. Short run (SR): time period when capital (K) is fixed. Long Run: all inputs variable. Pattern of Employment Over Time See Figure 4.1. Level of employment reflects demand for labor. Three important features: 1) Huge ? # jobs: 1950: 60 million; 2001: 156 million. 2) ? composition of jobs: ? Agriculture; big growth service and government (now 80% of jobs). 3) cyclical variation in # jobs. 10 recessions between 1950 and 2002. Marginal Productivity Theory of Demand Simplifying assumptions: 1) firm’s goal is to maximize $ profits 2) Two factors of production (K and L). 3) Both input and output markets are perfectly competitive, or PC (wages and prices treated as fixed). 4) Wages are only cost of labor and labor is homogeneous. Firm’s Hiring Decision in the Short Run (SR) Now K fixed; only L variable. Rule: Hire another worker as long as the worker adds at least $1 to profits. Or: hire another worker as long as the cost of that worker (his wage) is less than or equal to the value of that worker’s extra output. New Terms Production Function: shows how inputs can be combined to produce output, given a specific state of technology. Q = F(K, L) Q = output K = capital L = labor SR: Firm can only ? Q by ? L. TP = total product = Q TPL = TP at each amount of L (with K fixed). More Terms Marginal product of labor: MPL = ?Q/?L. Average product of labor: APL = Q/L. Total revenue = TR = P * Q. Marginal revenue = MR = ?TR/?Q; where MR = P. See each unit of Q sold at same market price. Marginal revenue product of labor: MRPL = MPL * MR. Marginal cost of labor: MCL = wage. Firm’s Equilibrium Level of Employment Rule: keep hiring one more worker until worker’s marginal benefit (value