Lectures in Microeconomics-Charles W. Upton Labor Demand

Why study labor demand and supply? Factor markets are important in themselves.

Labor Demand Why study labor demand and supply? Factor markets are important in themselves. –We are all interested in labor markets –We are particularly interested in one aspect, human capital

Labor Demand Why study labor demand and supply? Factor markets are important in themselves. The theory says important things about the markets for particular commodities.

Labor Demand Why study labor demand and supply? Factor markets are important in themselves. The theory says important things about the markets for particular commodities. –We think of many commodities as factors of production. –An automobile is not a commodity per se, but a factor of production for transportation services.

Labor Demand Why study labor demand and supply? Factor markets are important in themselves. The theory says important things about the markets for particular commodities. Firms worry a great deal about this topic.

Labor Demand Why study labor demand and supply? Factor markets are important in themselves. The theory says important things about the markets for particular commodities. Firms worry a great deal about this topic. Many important political topics turn on an understanding of factor markets.

Labor Demand The Basics of Factor Demand K L Q1Q1 QoQo KoKo LoLo L2L2 L1L1 K2K2 K1K1 Production isoquants describe the relation between inputs and outputs

Labor Demand Two Key Propositions L abor has a positive marginal product. Labor has a diminishing marginal physical product

Labor Demand MPP and VMP Curves Q L MPP

Labor Demand MPP and VMP Curves Q L MPP $ L VMP = MPP x P

Labor Demand The Short Run Demand For Labor The VMP curve is the short run labor demand curve. $ L

Labor Demand The Short Run Demand For Labor The VMP curve is the short run labor demand curve. When the wage rate is w o, L o workers are demanded wowo LoLo $ L

Labor Demand The Short Run Demand For Labor The VMP curve is the short run labor demand curve. When the wage rate is w o, L o workers are demanded When the wage rate is w 1, L 1 workers are demanded wowo w1w1 LoLo L1L1 $ L

Labor Demand Change in Price In the price of the product increases, the VMP curve will shift up and the firm will hire more workers wowo LoLo $ L L1L1

Labor Demand Change in Price In the price of the product increases, the VMP curve will shift up and the firm will hire more workers wowo LoLo $ L L1L1 A fall in wages causes the firm to hire more workers; a rise in prices causes the firm to hire more workers.

Labor Demand Change in Price In the price of the product increases, the VMP curve will shift up and the firm will hire more workers wowo LoLo $ L L1L1 A fall in wages causes the firm to hire more workers; a rise in prices causes the firm to hire more workers. Caution: this analysis holds K constant

Labor Demand End ©2006 Charles W. Upton