1. Chapter 3
Labor Demand

2. Solution Assignment 3 Hick and Slutsky Old and new version
Measurement at same utility (How you measure utility? or What is Thai’s utility function?) or same budget (you can measure it easily)
Old and new version
The new version measures at current situation but you can not go back to measure at the past.

3. We will talk about Profit maximization Two steps decision
Short Run and Long run
In the short-run
With CE, price is exogenous variable
Cannot change plant/equipment scale
Fixed capital
Consider MP

4. Why firm hire labor? Demand (for good and product) from consumer
Firm acts as middleman  derived demand
Labor is different from other resource
Work situation (environment)
Social status and Opportunity
Need Respectful, Honor, Dignity

5. Production Function production function which is Example Cobb-Douglas
Marginal Product
Law of diminishing returns, marginal product

6. Optimal Point Value of Marginal Product Value of Average Product
Optimal at condition
At competitive market, it is equivalent to

7. Criticism on short run theory
Homogenous assumption about workers
Realistic
How to calculate marginal product?
How to identify production function?

8. Number of Workers
Output AP MP TP

9. Output P2
VAP P1
VMP
L is not optimal
L is optimal
Number of Workers

10. Wage
Industry’s Demand P1 P2
Sum of Demand
Number of Workers

11. Long Run Production In long run, all input variable can be changed
Isoquant and Isoprofit Concept
Shape of Isoquant depends on ability to substitution between two inputs

12. Example

13. Cost Minimization Given q* find the lowest C “Least cost combination”
Capital
Cost Minimization
Given q* find the lowest C
“Least cost combination” C1 C2 C* K* q* E*
Number of Workers

14. Output Maximization If q3 = q* then C3 = C* Or If C3 = C* then q3 = q*
Capital
Output Maximization
Given C* find the highest q
If q3 = q* then C3 = C* Or
If C3 = C* then q3 = q* C* K* q3 q1 q2 E*
Number of Workers

15. Capital C1 C2
Expansion Path C3 K* q1 q2 q3 E*
Number of Workers

16. Formal Derivation

17. note

18. Decreasing in Wage Rate
Capital F E q2 q1 w1 w2
Number of Workers

19. Scale Effect and Substitution Effect
Capital
Scale Effect and Substitution Effect
W1*
This is WRONG!! G F E q2 w1 q1 w2 x1 x2
Number of Workers x3

20. Scale Effect and Substitution Effect
Capital
Scale Effect and Substitution Effect
W1*
C0/r G
C1/r F E q2 w1 q1 w2 x1 x2
Number of Workers x3

21. About labor demand Always be downward sloping Decreasing in wage rate
Scale effect  Increase Production  increase employment
Substitution Effect  labor intensive  increase employment
Factors will be reallocated
More elastic of long run labor demand than short run labor demand

22. Determination factors of elasticity of demand
Elasticity of substitution
Elasticity of demand for product
increasing price  lower demand  decreasing labor (if labor intensive production)
Elasticity of supply for other inputs
Depend on substitutable between inputs

23. Marshall’s Rule of Derived Demand
labor demand is more elastic the greater the elasticity of substitution
labor demand is more elastic the greater the elasticity of demand for the output
labor demand is more elastic the greater labor’s share in total cost
the demand for labor is more elastic the greater supply elasticity of other factors of production

24. Minimum Wage Form of Policy Discussion
A national, government – legislated minimum wage
A national minimum wage (outcome of collective bargaining agreement)
An industry level minimum wage (industry collective bargaining)
Discussion
Should the minimum wage be reduced or increased?
Is the minimum wage effective in reducing earning inequality and poverty?
Why does a minimum wage exist?

25. Other Issues Elasticity of labor demand Elasticity of Substitution
Instrumental variable technique