Labor markets SFLS online

( Neoclassical theory of income distribution.)

Labor Markets

Ways to interpret Economic theory Ways to interpret Economic theory

Positive economics is the study of what is

结果是基于数据 Normative economics

is the study of what should be 是基于你的愿望是什么结果

This model explain some of the forces that describe the

world in a positive context.

These kind of pics are not about labor

markets strictly, but provide a

normative context to view

them in.

r > g Long term

trend

This labor market model doesn’t really explain some of

the graphs and pics in this PPT, but this is a fact of some trends in capitalism, but also human economic systems in

general.

This graph actually This graph actually shows how the model shows how the model in this PPT seems to in this PPT seems to

be true up to the be true up to the 1970’s but no longer 1970’s but no longer

as dominant of an as dominant of an explanation explanation

r > g r > g Long term Long term

trendtrend

Positive economics is the study of what is

结果是基于数据

Normative economics is the study of what should be

是基于你的愿望是什么结果

- factor prices determined by supply and demand- each factor is paid the value of its marginal product

Neoclassical theory of income distribution.

***Most economists use this theory a starting point for understanding the distribution of income.

If MB > MC, do more of itIf MB < MC, do less of itIf MB = MC, stop here

We’ve spent so much time on one side of the

circular flow with product markets, now

it’s the same principles but for the factor

market side, though the suppliers and

demanders have switched places.

Price

Quantity of output

S

D

Quantity of inputQ1

P1

Supply and Demand for a normal market for apples

Cost of factor

Market for factors of production to make apples

The main concept is the same and they feed each other, however the demand for the market on the right depends on the supply of the market on the left.

(business needs of labor to make a apple)(how many apples the business is willing to make.)

THE ANATOMY OF FACTOR MARKETS

S

D

Q1

C1

Building the Model

Labor markets will be broken up into two types of markets:

- The typical firm is a price takerin the market for the product it produces and in the labor market

- monopsony

Competitive markets

Non-Competitive markets

We assume that firms care only about maximizing profits.

Each firm’s supply of output and demand for inputs are derived from this goal.

-A market where there is only one single buyer of labor.

Building the Model- We will look at the supply and demand for labor

only.- Since the other resource markets work in basically the

same way, we only have to look at one and simply apply the same logic and analysis to the others.

- This does cause confusion with labels.- This is because books and other sources will either

discuss resources and label it that way or just discuss labor and label it that way, and sometimes it confusing, but for now at this level of discussion they will mean the same thing.

- I will try to focus and use the same labels throughout, just beware some may be used interchangeable.

DEMAND FOR A FACTOR OF PRODUCTION

Quantity of input

Cost of factor

S

D

Q1

C1

1.) Derived Demand

Example:- Jack owns an apple farm- He makes a determination about how many apples he

can sell in the market and the prices he can get for them.

- Jack needs factors to make his apples.- He determines how many workers to hire based on his

supply in the market.

Markets for the factors of production (resources) are like markets for goods & services, except it depends on two things:

-comes from a firm’s decision to supply a good in another market that the factor helped produce.


Price

Quantity of output

S

D

Quantity of inputQ1

P1


Cost of factor


D

Q1

C1

- Jack needs factors to make his apples.- He determines how many workers to

hire based on his supply in the market.


Markets for the factors of production (resources) are like markets for goods & services, except it depends on two things:

If MB > MC, do more of itIf MB < MC, do less of itIf MB = MC, stop here

- The value to a firm of hiring one more unit of a factor of production.It is downward sloping because of DMR

2.) Marginal Productivity

Example question:I work for Jack’s apple farmWhat am I worth to my emplorer?

Jack askes himself two questions:1.) Does the worker contribute greatly to the total amount of apples produced.2.) Am I getting a good value for his production- the worker must be paid a wage, is it worth the output he is giving me?

1.) Derived Demand


- Cost incurred by hiring additional input. (amount each resource needs to be paid to be used.)

∆ Total Resource Cost∆ Resource Quantity

MRC =

(MRC) Marginal Resource Cost

= WAGE(MRC)

(MFC) Marginal Factor Cost

or

***In a competitive market

= Supply

SUPPLY FOR A FACTOR OF PRODUCTION

- Equals the price per unit produced times marginal product of factor

- Revenue created by hiring additional input.

∆ Total Revenue∆ Resource QuantityMRP =

(MRP) Marginal Revenue Product

MR * MP of a resource

MR * MPL

MRP =

MRP =

MRP = Demand


(MR) Marginal Revenue

Profit Maximization

∆TR∆Q

Profit-Maximizing Output: level at which (MR) marginal revenue equals (MC) marginal cost

MR = MC

We assume all firms are profit maximizing, producing at the point where their profits are at their highest

(MC) Marginal Cost ∆TC

∆Q

Remember all Remember all this?this?

Profit-Maximizing Output: level at which (MR) marginal revenue equals (MC) marginal cost

MR = MC

Profit-Maximizing Inputs: level at which (MRP) marginal revenue product equals (MRC) marginal resource cost

MRP = MRC

It the same It the same basic ideabasic idea

- The price you get for the product vs. the price you pay to make it.

Example:

-Hire one more worker. -how much more does that worker produce.-What is the price I sell these extra goods produced.-Is the price I sell them for higher then the price I paid for it to be produced.

One more time in simpler English…

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MRC or MFC = W (Wage)

MPLVMPL or MRP =MPL * MRMR = P

MRP = MRCHire workers until…..

$10

$10 $50

$20

$20

$20

$20

$10

$10

$20

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$10




Price

Quantity of output

S

D

Quantity of inputQ1

P1


Cost of factor


The main concept is the same and they feed each other, the demand for the market on the right depends on the supply of the market on the left.

Right graph - (business needs of labor to make a apples) Left graph - (how many apples the business is willing to make.)

D

Q1

C1



So some more abbreviations that I hope are not confusing…

DEMAND FOR A FACTOR (Labor) OF PRODUCTION

Replace “resource with “labor”

(MPL) Marginal Product of Labor

MR x MP of a resource

- the increase in the amount of output from an additional unit of labor.

∆Q∆LMPL =

MR x MPL



- the increase in the amount of output from an additional unit of labor.

A different book would explain it this way……



- the increase in the amount of output from an additional unit of labor.Problem:

- Cost of hiring another worker (wage) is measured in dollars. - Benefit of hiring another worker (MPL) is measured in units

of output. Solution: convert MPL to dollars.




- the increase in the amount of output from an additional unit of labor.Problem:

- Cost of hiring another worker (wage) is measured in dollars. - Benefit of hiring another worker (MPL) is measured in units

of output. Solution: convert MPL to dollars.


(VMPL) Value of the Marginal Product of Labor

(MR) Marginal Revenue = P All perfectly competitive markets

- the marginal product of an input times the price of the output.

P x MPL

VMPL =



(VMPL) Value of the Marginal Product of Labor

MR x MPL

=

- They mean the same thing, just some sources use one and some use the other.

This is the simplest equation to use for both =

= (D) Demand curve

- They mean the same thing, just some sources use one and some use the other.

VMPL = MRP

I.) Labor Market Demand

Q

PFor any competitive, profit-maximizing firm:To maximize profits,

hire workers up to the point where

VMPL = W. The VMPL or MRP

curve is the labor demand curve.

W1

L1

Farmer Jack has an apple farm - Cost of hiring another worker:

the wage – the price of labor

- Benefit of hiring another worker:Jack can produce more apples to sell,

increasing his revenue.

DEMAND FOR LABOR Example:

Farmer Jack has an apple farm - Cost of hiring another worker:

the wage – the price of labor

- Benefit of hiring another worker:Jack can produce more apples to sell,

increasing his revenue.

- The size of this benefit depends on Jack’s production function:

DEMAND FOR LABOR Example:

- the relationship between the quantity of inputs used to make a good and the quantity of output of that good.

0

500

1,000

1,500

2,000

2,500

3,000

0 1 2 3 4 5No. of workers

Quan

tity

of

outp

ut

Farmer Jack’s Production Function

30005

28004

24003

18002

10001

00

Q (bushels of apples per week)

L(no. of

workers)

DEMAND FOR LABOR Example

P = $5/bushel.Find MPL and VMPL,

3000528004240031800210001

00

VMPLMPLQ

(bushels of apples)

L (# of workers)


Farmer Jack’s production function exhibits diminishing marginal product: MPL falls as L increases.This property is very common.

3000528004240031800210001

00

VMPL = P x MPL

MPL = ∆Q/∆L

Q (bushels of apples)

L (# of workers)

1,0002002,0004003,0006004,000800

$5,0001000


P = $5/bushel.Find MPL and VMPL,

Farmer Jack’s VMPL curve is downward sloping due to diminishing marginal product.

L (number of workers)

The VMPL curve

0

1,000

2,000

3,000

4,000

5,000

$6,000

0 1 2 3 4 5


VMPL = P x MPL

1,0002,0003,0004,000

$5,000

Suppose wage W = $2500/week. How many workers should Jack hire?


The VMPL curve

0

1,000

2,000

3,000

4,000

5,000

$6,000

0 1 2 3 4 5

$2,500


At any larger L, can increase profit by hiring one fewer worker.

Suppose wage W = $2500/week. How many workers should Jack hire?Answer: L = 3


The VMPL curve

0

1,000

2,000

3,000

4,000

5,000

$6,000

0 1 2 3 4 5

$2,500

At any smaller L, can increase profit by hiring another worker.


SUPPLY FOR A FACTOR OF PRODUCTION

Quantity of input

Cost of factor

S

D

Q1

C1

Replace “resource” with “labor”

(MRC) Marginal Resource Cost ∆ Total Resource Cost

∆ Resource Quantity =

SUPPLY FOR A FACTOR (Labor) OF PRODUCTION

= WAGE

So some more abbreviations that I hope are not confusing…

Marginal cost of laborMarginal Q of labor =(MRC)

= WAGE

(MRC)

All perfectly competitive markets

= (S) Supply curve

(MFC) Marginal Factor Cost

or

P

Q

P

S

D

QQ1

P1

This is the Demand and Supply Lines of the whole market

P

This line ends up being the only price they can charge

= MR

Which is also their marginal revenue on each unit

= D=AR

And the average revenue

So this is the demand curve for the single firm in the market.

I.) Perfect Competition Product Demand

So, remember this?

P

Q

Perfect Competition Resource SupplyS

D

LQ1

P1

Supply and Demand and curves of the whole labor market.

W

Supply and Demand curves for the single firm in a perfectly competitive market.

MRC= Wage = S

So this is the resource supply curve for the single firm in the market.Same idea

here.

FACTOR (Labor) MARKETS OF PRODUCTIONThe Supply of

Labor - People supply labor to earn an income.

Many factors influence the quantity of labor that a person plans to provide, but the wage rate is a key factor.

Key Influences on the Supply of Labor:

- An increase in the adult population increases the supply of labor.

Adult Population

- Example - There has been a large increase in the supply of female labor since 1960.

Preferences

- The more people who remain in school for full-time education and training, the smaller is the supply of low-skilled labor.

Time in School and Training

P

Q

Labor MarketsS

D

LQ1

P1

Labor supply and demand for the whole market

W

Labor supply and demand for a single competitive firm

MRC = Wage = S

MRP = VMPL = D

L1

w1

Labor market for a competitive firm, similar idea as a perfect

competition market

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Building the Model



- monopsony

Competitive markets





So this PPT is about this labor market

structure

Building the Model



- monopsony

Competitive markets





Next PPT is this one

That’s it for nowThank you

Education

Labor markets SFLS online