Transcript Labor Supply

Labor Markets
Supply and Demand
Wages
 Wage = Price of labor including fringe benefits
 Real wage = adjustment for inflation
Labor Demand
= the relationship b/n the quantity of labor demanded by
firms and wage
 Derived Demand = demand for an input is derived from
demand for the product produced with that input
 If employing another worker increases profit, that worker
will be hired (MRP = Wage)
Determining the Demand Curve
(Within a Competitive Firm)
Product market reminders!
The additional quantity produce from the addition of one more worker
MP =
(input)
Marginal Product is drawn as…
Output
MP creates the principle of….
Diminishing Marginal Returns
A firm will produce where…
Input
TR = P x Q
MR = MC
Marginal Revenue Product of Labor
Change in Total Revenue when one additional unit of labor is employed
Change TR or P x MP of Labor (MPL)
Change L
 MPL = increase in quantity produced when labor increased
by one unit
 MRP = increase in Total Revenue when labor increased by
one unit
How many workers should a firm
hire?
A firm will hire workers such that MRP = Wage
(if no fractional unit, then when MRP > Wage)
Demand Curve for Labor
 Downward sloping
Derived from downward sloping MRP curve
 As wage decreases quantity labor demanded increases
 Movements along the curve
 Shifts occur because of two reasons

Change in the Price of the good produced
 Change in the MP of labor
* MRP = MP x P

How does this apply to firms with
Market Power?
 Same concept
 Price
and output still inversely related
 MRP declines more sharply
 MRP = MR x MP
 Firm is not a price taker
Labor Supply
Substitution Effect
Higher the wage, the
more attractive work is
to the alternatives
Income Effect
The higher the wage, the
less hours worked to earn
the same amount
Wage
Wage
Labor
Supply
Q of Labor
What would it look like if Substitution Effect = Income Effect?
Labor
Supply
Q of Labor
Backward Bending Labor Supply
Curve
Wage
Income Effect dominates
in this region
Income and Substitution
effect cancel out
Substitution Effect
Dominates
Q of Labor
Discrimination in the Labor Market
 Firms that discriminate pay less than Marginal
Product of Labor
Wage
Labor Supply
Actual Marginal Revenue Product
Firms acts as if MRP is lower than it is
Number of Minority Workers
Minimum Wage
Skilled Workers
Unskilled Workers
Wage
Wage
Labor Supply
Labor Supply
Labor Demand
Labor Demand
Q of Labor
Q of Labor
Labor Unions
Two suggested reasons why wages are higher for those in a union
 Restricted Supply  limit membership – shifts labor supply leftward
raising wages
 Increased Productivity  provide a way to improve relations w/in
work place  more productive worker = higher wages
Monopsony & Bilateral Monopoly
 Monopsony = a single buyer of a particular
good/service in a market
 Bilateral Monopoly = one buyer and one seller in
a market