Warm-Up P=$10; W=$100 What is the MRP of the 2nd unit? Units of Labor Output 1 30 2 55 3 70 4 78 5 85 6 89 P=$10; W=$100 What is the MRP of the 2nd unit? Will the firm employ the 2nd unit? How many units will the firm employ?

Labor Market Chapter 20: Factor Markets and the Distribution of Income (pages 528-533)

Labor Market Options There are two choices for suppliers: Leisure Choose until MB = MC

What Would You Do? Pay goes from $10 to $20/hour… Reasons to work less… Earn more in less time Even 1 fewer hour = more money Reasons to work more… Earn 2X as before More you work the more you make

2 Forces at Work… Substitution Effect Opportunity cost of leisure increases Supply more labor Wage rate Individual labor supply curve $20 10 40 50 Quantity of labor (hours)

2 Forces at Work… Income Effect Higher wage = relatively more wealthy Consume more leisure (b) The Income Effect Dominates Wage rate $20 10 Individual labor supply curve 30 40 Quantity of labor (hours)

2 Forces at Work…

Market Labor Supply Curve Sum of individual supply curves Change in wage = movement Based on MARGINAL FACTOR COST MFC = Wage X Quantity of labor

Marginal Factor Cost Units of Labor Wage Total Labor Cost MFCL $0 1 $8 $0 1 $8 2 $9 $18 $10 3 $30 $12 4 $11 $44 $14 5 $60 $16 6 $13 $78

Labor Market Equilibrium Wage rate Marginal Factor Cost (Supply) Equilibrium value of the marginal product of labor E W* Marginal Revenue Product (Demand) L* Quantity of labor (workers) Equilibrium employment

Profit-Maximizing Rule… Hire labor until … Value last worker = cost of last worker MRPL = MFCL

Shifts in Labor Supply Caused by changes in: Preferences Population Opportunities Wealth

When Markets are Imperfect… Perfect markets = same wage for all Imperfect markets = higher wages for more workers EXAMPLE: Monopsony

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