1. Chapter 7: Factor Markets and Employment zThis chapter -- looks at the behavior in factor markets, the Demand and Supply for inputs used in production. zWe will focus on the labor market, although the analysis applies to markets for (physical) capital and materials.

2. The Demand For Labor zDemand for Labor (N D ) -- firms decision regarding how many workers they wish to hire. zProfit maximizing firms under perfect competition make this decision simultaneously with their output decision (Q 0 ), using their production function.

3. The Demand for Labor: Causes zWage Rate (W), W  (ceteris paribus)  N D . zPrice of Good They Produce (P), P   N D . zPrice of Other Inputs -- Materials (e.g. Energy) -- Physical Capital zTechnology (Tech)

4. The Cost of Other Inputs and the Demand for Labor zThe effect of a change in the price of other inputs depends upon whether they are a complement or a substitute to labor. zExample – suppose that the price of physical capital (P K ) decreases. How does the firm respond in their labor hiring?

5. Other Inputs and the Demand for Labor zInput Complements (e.g. truck and truck driver), P K   N D . zInput Substitutes (e.g. welding machine and welder), P K   N D . zWe generally assume that inputs are complements (substitution occurs due to technology).

6. Technology and the Demand for Labor zDepends upon whether technology is labor-enhancing or labor-saving. zLabor-Enhancing Technology (e.g. personal computers and secretaries), Tech   N D . zLabor-Saving Technology (e.g. robot and assembly line worker), Tech   N D .

7. Formalizing the Theory of Labor Demand zGraph N D versus one of its causes -- the wage rate (W). zInverse relationship implies that the curve is downward sloping. zChanges in W are described as a movement along the curve. zGraph is drawn assuming that the other causes are constant (ceteris paribus).

8. Describing Changes in One of the “Other Causes” zA change in any cause other than the wage rate is described by a shift of the Labor Demand curve. zContrast this with a change in W -- movement along the curve. zDifferent descriptions occur only because W is the cause that appears on the graph.

9. Shifting the Labor Demand Curve zA change -- other than W -- that makes N D increase is described as a rightward shift of the curve, or an Increase in Labor Demand. zA change -- other than W -- that makes N D decrease is described as a leftward shift of the curve, or a Decrease in Labor Demand.

10. Labor Supply zThe Supply of Labor (N S ) – consumers desire to offer their labor services based upon the wage rate and other causes. zRational consumers assess the marginal benefits versus the marginal costs (especially opportunity costs) of working versus leisure.

11. The Market Supply of Labor: Causes zWage Rate (W), W   N S . zWealth, WEALTH   N S . zTastes – Attitudes Toward Work Versus Leisure (choosing not to work outside the home). zTransfer Payments (e.g. welfare) – Transfer Payments   N S . zNumber of People Seeking Employment.

12. Formalizing the Theory of Labor Supply zGraph N S versus one of its causes -- the wage rate (W). zPositive relationship implies that the curve is upward sloping. zChanges in W are described as a movement along the curve. zGraph is drawn assuming that the other causes are constant (ceteris paribus).

13. Describing Changes in One of the “Other Causes” zA change in any cause other than the wage rate is described by a shift of the Labor Supply curve. zContrast this with a change in W -- movement along the curve. zDifferent descriptions occur only because W is the cause that appears on the graph.

14. Shifting the Labor Supply Curve zA change -- other than W -- that makes N S increase is described as a rightward shift of the curve, or an Increase in Labor Supply. zA change -- other than W -- that makes N S decrease is described as a leftward shift of the curve, or a Decrease in Labor Supply.

15. Equilibrium in the Labor Market zDetermines an equilibrium level of employment (N*) and wage rate (W*) within an industry. zThe variable W* is Equilibrium Total Compensation per Hour (or Person) – salary and benefits.

16. Equilibrium in the Labor Market zTrue equilibrium, same as goods markets. zShifts in either Labor Demand or Labor Supply change the equilibrium.

17. Example 1: The Effect of Labor-Saving Technology zSuppose that automakers adopt labor- saving technology in their assembly lines. zThis behavior implies that firms will demand less labor, i.e. Tech   N D . zThis behavior is described as a leftward shift of the labor demand curve. zAs a result, for automakers W*  and N*  (is technology worth it?).

18. Example 2: Lowering Transfer Payments zSuppose that the government decides to reduce transfer payments, such as welfare and unemployment compensation. zThis behavior implies that more people will decide to seek work, meaning that labor supply will increase, Transfer Payments   N S .

19. Example 2 Continued zThis behavior is described as a rightward shift of the labor supply curve. zAs a result, W*  and N* . zGovernment decisions – trading off economic benefits and costs versus social benefits and costs.