1. Lectures in Microeconomics-Charles W. Upton Applying Labor Demand

2. From Firm Demand to Market Demand w Q D1D1 wowo q1q1

3. Applying Labor Demand From Firm Demand to Market Demand w Q D2D2 D1D1 wowo q1q1 q2q2

4. Applying Labor Demand From Firm Demand to Market Demand w Q D2D2 D1D1 D m = D 1 +D 2 wowo q1q1 q2q2 q m =q 1 +q 2

5. Applying Labor Demand Applications Short Run Labor Demand

6. Applying Labor Demand Applications Short Run Labor Demand –A change in wage rates –A change in the price of the product

7. Applying Labor Demand Applications Short Run Labor Demand –A change in wage rates –A change in the price of the product Long Run Labor Demand

8. Applying Labor Demand Applications Short Run Labor Demand –A change in wage rates –A change in the price of the product Long Run Labor Demand –A change in wage rates –A change in the price of the product

9. Applying Labor Demand A Change in the Wage Rate- Short Run Labor Demand When the wage rate is w o, L o workers are demanded. wowo LoLo $ L

10. Applying Labor Demand A Change in the Wage Rate- Short Run Labor Demand 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 LoLo $ L w1w1 L1L1

11. Applying Labor Demand A Change in the Wage Rate- Short Run Labor Demand 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 LoLo $ L w1w1 L1L1

12. Applying Labor Demand A Change in the Wage Rate- Short Run Labor Demand 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 In short, the lower the wage rate the greater the quantity of labor demanded

13. Applying Labor Demand A Change in the Product Price- Short Run Labor Demand When the wage rate is w o, L o workers are demanded. wowo LoLo $ L

14. Applying Labor Demand A Change in the Product Price- Short Run Labor Demand When the wage rate is w o, L o workers are demanded. If the price rises to P*, the VMP curve shifts up and to the right wowo LoLo $ L VMP = MPP x P*

15. Applying Labor Demand A Change in the Product Price- Short Run Labor Demand When the wage rate is w o, L o workers are demanded. If the price rises to P*, the VMP curve shifts up and to the right wowo LoLo $ L L1L1

16. Applying Labor Demand A Change in the Product Price- Short Run Labor Demand When the wage rate is w o, L o workers are demanded. If the price rises to P*, the VMP curve shifts up and to the right wowo LoLo $ L L1L1 The quantity of labor demanded increases to L 1

17. Applying Labor Demand A Change in the Product Price- Short Run Labor Demand When the wage rate is w o, L o workers are demanded. If the price rises to P*, the VMP curve shifts up and to the right wowo LoLo $ L L1L1 The quantity of labor demanded increases to L 1 The short run means no time to change capital stock

18. Applying Labor Demand A change in the Wage Rate-Long Run Labor Demand Change in Quantity of Labor Demanded = Substitution Effect + Scale Effect

19. Applying Labor Demand A change in the Wage Rate-Long Run Labor Demand Change in Quantity of Labor Demanded = Substitution Effect + Scale Effect A fall in the wage rate means increased quantity demand via the substitution effect.

20. Applying Labor Demand A change in the Wage Rate-Long Run Labor Demand Change in Quantity of Labor Demanded = Substitution Effect + Scale Effect A fall in the wage rate means increased quantity demand via the substitution effect. While the scale effect could be negative and theoretically reverse the substitution effect, it is unlikely.

21. Applying Labor Demand A Change in the Product Price- Long Run Labor Demand L K L* Let’s see what happens when in the long run when the price of a product changes. Initially the firm is employing L* workers.

22. Applying Labor Demand The Marginal Cost Curve L K L* MC Q* The Level of Operation is set by MC = P

23. Applying Labor Demand The Marginal Cost Curve L K L* MC Q* Q** The Level of Operation is set by MC = P When P rises, the level of output will increase

24. Applying Labor Demand Substitution Effect L K L* MC Q* Q** There is no substitution effect, but the scale effect is probably positive, so that the higher price probably leads to an increased demand.

25. Applying Labor Demand End ©2006 Charles W. Upton