Factor Market-Labor Market

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PowerPoint Presentation : There a two situations we are going to analyze Labor Markets: Perfect Competition for a Good AND for the Labor to produce that good. Imperfect Competition for a Good AND for the Labor to produce that good We are going to look at Number 1 in this lesson.

PowerPoint Presentation : “Perfectly Competitive Market for (1) the Product and (2) Labor In a Perfectly Competitive Market for a Good the Price the firm receives is Constant 1. It can SELL all it produces for that constant price 2. The price is set in the Market for the good and the firm is a Price-Taker 3. The DEMAND for its good is Perfectly Elastic (horizontal)—the Firm can sell as much as it can at the Market Price. In a Perfectly Competitive Market for Labor the Price the Firm PAYS for Labor is Constant 1. It can HIRE (“buy”) all the workers it needs at a Constant Wage 2. The wage is set in the Market for Labor and the firm is a Wage-Taker a. Think Fast Food workers. 3. The SUPPLY of labor is Perfectly Elastic (horizontal)—the Labor market SUPPLIES all the workers the firm needs at the Market Wage Labor is an INPUT that goes into the Production of an OUTPUT. Labor is a function/Factor of Production. The DEMAND for an input like Labor is dependent on the DEMAND FOR THE OUTPUT (good/service) So, the Demand for a factor like labor is called DERIVED DEMAND .

PowerPoint Presentation : “Perfectly Competitive Market for (1) the Product and (2) Labor (Table from W elkernomics ) Vocabulary: Quantity of Labor ( L )---the number of workers a firm could hire Total Product ( TP )---How much ALL workers contribute to Production Marginal Product of Labor( MP L )---How much EACH worker contributes to the running total Price of the Product ( P )---In a Perfectly Competitive Market the Firm is a PRICE TAKER—Price Constant! Marginal REVENUE Product of Labor ( MRP L )---The dollar value of EACH WORKER Marginal Product. MP L X P = MP L Marginal Revenue Product of Labor ( MRP L ) is the same of Value Marginal Product of Labor ( VMP L )

PowerPoint Presentation : Firm Labor MRP L (W) Quantity of Labor $12 $10 $8 $6 $4 $2 $0 $-2 1 2 3 4 5 6 7 8 (Table from W elkernomics ) And so it begins…We first want to plot our MRP L values. These values ALSO represent Potential wages (“W” ) an employer MIGHT be Willing to pay a worker based on their PRODUCTIVITY and The PRICE OF THE GOOD (more on that later)

PowerPoint Presentation : Firm Labor Quantity of Labor $12 $10 $8 $6 $4 $2 $0 $-2 1 2 3 4 5 6 7 8 (Table from W elkernomics ) MRP L (W)

PowerPoint Presentation : Firm Labor Quantity of Labor $12 $10 $8 $6 $4 $2 $0 $-2 1 2 3 4 5 6 7 8 (Table from W elkernomics ) MRP L (W)

PowerPoint Presentation : Firm Labor Quantity of Labor $12 $10 $8 $6 $4 $2 $0 $-2 1 2 3 4 5 6 7 8 (Table from W elkernomics ) MRP L (W)

PowerPoint Presentation : Firm Labor Quantity of Labor $12 $10 $8 $6 $4 $2 $0 $-2 1 2 3 4 5 6 7 8 (Table from W elkernomics ) MRP L (W)

PowerPoint Presentation : Firm Labor Quantity of Labor $12 $10 $8 $6 $4 $2 $0 $-2 1 2 3 4 5 6 7 8 (Table from W elkernomics ) MRP L (W)

PowerPoint Presentation : Firm Labor Quantity of Labor $12 $10 $8 $6 $4 $2 $0 $-2 1 2 3 4 5 6 7 8 (Table from W elkernomics ) MRP L (W)

PowerPoint Presentation : Firm Labor Quantity of Labor $12 $10 $8 $6 $4 $2 $0 $-2 1 2 3 4 5 6 7 8 (Table from W elkernomics ) MRP L (W)

PowerPoint Presentation : Firm Labor Quantity of Labor $12 $10 $8 $6 $4 $2 $0 $-2 1 2 3 4 5 6 7 8 D* for Labor “D L” Our DEMAND CURVE for Labor Determined by the MRP L for each worker (Table from W elkernomics ) MRP L (W)

PowerPoint Presentation : Firm Labor Quantity of Labor $12 $10 $8 $6 $4 $2 $0 $-2 1 2 3 4 5 6 7 8 D* for Labor “D L” Getting a little ahead of myself, but if the Wage Rate (determined in the Market for Labor—we will get to that) is $6.00 per hour , HOW MANY WORKERS WILL IT HIRE? (hint: look at the Marginal Revenue Product of Labor column) (Table from W elkernomics ) MRP L (W)

PowerPoint Presentation : Firm Labor MRP L Quantity of Labor $12 $10 $8 $6 $4 $2 $0 $-2 1 2 3 4 5 6 7 8 D* for Labor “D L” It will hire 6 workers…WHY? The Profit Maximization Rule of Resource Employment Marginal Resource Cost (MRC, aka Wage (w) = Marginal Revenue Product of Labor (MRP L ) MRC (w) = MRP L (Table from W elkernomics )

PowerPoint Presentation : Firm Labor Quantity of Labor $12 $10 $8 $6 $4 $2 $0 $-2 1 2 3 4 5 6 7 8 D* for Labor “D L” (Table from W elkernomics ) It won’t want to pay $6.00 per hour to the 5 th Worker, because that worker only contributes $4.00 to Revenues. He/She costs more than he/she brings in! NO!!! MRP L (W) “A”

PowerPoint Presentation : Firm Labor Quantity of Labor $12 $10 $8 $6 $4 $2 $0 $-2 1 2 3 4 5 6 7 8 D* for Labor “D L” (Table from W elkernomics ) You WANT to hire workers 1,2, and 3 FOR SURE Because each of them produces revenue GREATER than what the Firm pays them. The Firm hires that 4 th Worker because it will Maximize Profits even though you pay him = to what he brings in . HIRE UNTIL: MRC (W) = MRP L YES!! MRP L (W) “A”

PowerPoint Presentation : Market for Labor Wage (w) Quantity of Labor Q L * W* ($6.00 D L * S L * Assumption : the Firm is hiring in a “Perfectly Competitive Labor Market”. The firm Can HIRE as many workers as it wants at the Wage Rate Set in the Market (graph on RIGHT). In other words the market SUPPLIES workers to the firm at a rate of $6.00 per hour. IMPORTANT POINT: The LABOR SUPPLY CURVE for the FIRM is Horizontal at the Market set Wage Rate--- The firm SUPPLY CURVE is PERFECTLY ELASTIC!! “A”

PowerPoint Presentation : Market for Labor Wage (w) Quantity of Labor Q L * W* ($6.00 D L * S L * Assumption : the Firm is hiring in a “Perfectly Competitive Labor Market”. The firm Can HIRE as many workers as it wants at the Wage Rate Set in the Market (graph on RIGHT). In other words the market SUPPLIES workers to the firm at a rate of $6.00 per hour. IMPORTANT POINT: The LABOR SUPPLY CURVE for the FIRM is Horizontal at the Market set Wage Rate--- The firm SUPPLY CURVE is PERFECTLY ELASTIC!! FIRM LABOR SUPPLY CURVE “A”

PowerPoint Presentation : Market for Labor Wage (w) Quantity of Labor Q L * W* ($6.00 D L * S L * FIRM LABOR SUPPLY CURVE GOT THAT!!!! Ok, I will assume you do. Now…We want to divide and conquer. Let’s isolate the Firm Labor Graph and look at what SHIFTS the Demand/MRP L Curve Oh, you thought it was going to be easy???

PowerPoint Presentation : S L * Focus only on the D*=MRP L * curve . The Marginal Revenue Product of Labor was Calculated by taking Marginal Product (MP) and multiplying it by Price (P) . Right? So, MRPL can change IF : Marginal Product (MP) changes and/or Price (P) changes. “A”

PowerPoint Presentation : S L * Let’s start with a change in Marginal Product (MP) and keep it simple. What allows a Worker to be MORE productive now and in the future? Education/Training/Skills/Processes (efficiencies) Technology/Capital Equipment. “A”

PowerPoint Presentation : S L * So, anything that allows a worker to produce MORE than they did before will INCREASE Their MARGINAL PRODUCT . ***All else equal and the Price of the good does not change then an increase in MP will INCREASE Marginal Revenue Product of Labor (MRP L )*** “A”

PowerPoint Presentation : Assume the Firm employs additional Capital, provides training to workers, or i n some other way increases the efficiency level to produce. Assume this allows EACH worker to produce an additional 2 Units of the good each hour. See the chart above as I add to more units to the Marginal Product, then Change the Marginal Revenue Product of Labor for each worker. PRICE X MARGINAL PRODUCT = MARGINAL REVENUE PRODUCT OF LABOR 8 7 6 5 4 3 2 1 $16 $14 $12 $10 $8 $6 $4 $2

PowerPoint Presentation : S L * $16 PLOT THESE POINTS to get A NEW MRP L Curve “A”

PowerPoint Presentation : S L * $16 Connect these Points For form a NEW MRP L curve “A”

PowerPoint Presentation : S L * $16 D1 = MRP L 1 Notice we are at a NEW equilibrium , Point “B”. The wage DID NOT CHANGE but the number of workers the firm can hire at $6.00 per hour has INCREASED to 6! “B” “A”

PowerPoint Presentation : S L * $16 D1 = MRP L 1 ***When PRODUCTIVITY INCREASES the MRP of Labor Curve shifts to the RIGHT a nd the firm can hire more workers. “B” “A”

PowerPoint Presentation : S L * $16 Ok, let’s start over and change the Price. Assume the Price the Perfectly Competitive Firm receives for the Good INCREASES to $3.00. “A” $3 $3 $3 $3 $3 $3 $3 $3

PowerPoint Presentation : S L * $16 Now re-calculate MRP of Labor by taking MP X New Price. “A” $3 $3 $3 $3 $3 $3 $3 $3 $18 $15 $12 $9 $6 $3 $0 -$3

PowerPoint Presentation : S L * $16 D1 = MRP L 1 If we plot these MRP of Labor points we get a new MRPL curve that lies to the RIGHT of the old one and the NEW equilibrium point is “B” at 5 workers. “B” “A” $3 $3 $3 $3 $3 $3 $3 $3 $18 $15 $12 $9 $6 $3 $0 -$3

Bottom Line on Shifting the MRP of Labor Curve : Bottom Line on Shifting the MRP of Labor Curve An increase in Productivity will Shift it to the RIGHT allowing the firm to hire MORE workers. An increase in the Price will shift it to the RIGHT allowing the firm to hire MORE workers. A decrease in Productivity will Shift it to the LEFT and FEWER workers will be hired A decrease in the Price will Shift it to the LEFT and FEWER workers will be hired.

What happens when there is a change in the MARKET WAGE?? : What happens when there is a change in the MARKET WAGE?? In the Market for Labor things can change to either affect the Demand for Labor and/or the Supply of Labor. Let’s look at how the Firm responds to changes in the Wage that they have NO control over ( ceterus paribus assumption)

PowerPoint Presentation : Market for Labor Wage (w) Quantity of Labor Q L * W* ($6.00 D L * S L * Look at the Market for Labor graph on the RIGHT. There are TWO things that could cause the Wage Rate to INCREASE . An INCREASE in DEMAND for Labor shifting the Demand curve to the RIGHT A DECREASE in SUPPLY of Labor shifting the Supply curve to the LEFT “A” “A”

PowerPoint Presentation : Market for Labor Wage (w) Quantity of Labor Q L * W* ($6.00 D L * S L * Let’s shift the Demand Curve to the RIGHT suggesting there is an INCREASE in Demand for Labor in This market. The NEW MARKET WAGE IS $10.00 “A” D L 1 Q L 1 W 1 ($10) “B”

PowerPoint Presentation : Market for Labor Wage (w) Quantity of Labor Q L * W* ($6.00 D L * S L * Because the Firm is a Wage Taker , the Firm Supply Curve for Labor SHIFTS UP! “A” D L 1 Q L 1 W 1 ($10) “A” “B”

PowerPoint Presentation : Market for Labor Wage (w) Quantity of Labor Q L * W* ($6.00 D L * S L * Now, the Firm has to look at how this new wage matches up with its own Labor Demand curve---D* = MRP L * Remember the Profit Maximizing Quantity of Labor: MRC (W) = MRP L The firm now finds that only 2 workers will be necessary. “A” D L 1 Q L 1 W 1 ($10) “B” “B” “A”

PowerPoint Presentation : Market for Labor Wage (w) Quantity of Labor Q L * W* ($6.00 D L * S L * Now, look at how the firm responds if there is a DECREASE in the Market Wage. This could happen if: Demand for Labor DECREASES Supply of Labor INCREASES “A” “A”

PowerPoint Presentation : Market for Labor Wage (w) Quantity of Labor Q L * W* ($6.00 D L * S L * Let’s shift the Demand Curve to the LEFT suggesting there is an DECREASE in Demand for Labor in This market. The NEW MARKET WAGE IS $4.00 “A” D L 1 Q L 1 W 1 ($4.00) “B”

PowerPoint Presentation : Market for Labor Wage (w) Quantity of Labor Q L * W* ($6.00 D L * S L * The Firm is a Wage Taker so the new Firm Supply Curve will shift DOWN. There is a new equilibrium in on the FIRM graph where: MRC ($4.00/hour) = MRP L ($4.00) The firm will INCREASE hiring to 5 Workers “A” D L 1 Q L 1 W 1 ($4.00) “B” “B”

Bottom Line : Bottom Line If the firm is hiring in a Perfectly Competitive Labor Market: It will hire more workers if the wage decreases It will hire fewer workers if the wage increases CETERUS PARIBUS!! If wage rate increases, as in a higher minimum wage this can be offset by what we learned prior to this: If those workers become MORE productive and/or the Price of the good they produce INCREASES. This is an important part of the debate about increasing the Minimum Wage.

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