1. Copyright © 2009 Pearson Education, Inc. Chapter 3 The Demand for Labor

2. Copyright © 2009 Pearson Education, Inc. 3- 2 Profit Maximization Output Approach: Increase output if the additional revenue > additional cost until MR=MC Input Approach: Hire inputs if the additional revenue > additional cost until MRP=MEI

3. Copyright © 2009 Pearson Education, Inc. 3- 3 Derived Demand Marginal Product (MP) Diminishing Marginal Returns Marginal Revenue (MR) Marginal Revenue Product (MRP) Marginal Expense of an Added Input Important Definitions - Marginal Revenue Product

4. Copyright © 2009 Pearson Education, Inc. 3- 4 Important Definitions - Marginal Revenue Product MP = Change in Output/Change in Input MR = Change in Revenue/Change in Output MRP = Change in Revenue/Change in Input MRP = MP x MR (general case) MRP = MP x P (competitive product market) MEI = Change in Total Cost/Change in Input

5. Copyright © 2009 Pearson Education, Inc. 3- 5 Short-Run Demand for Labor Assume: 1.Two inputs, capital and labor 2.Labor is variable and capital is Fixed 3.Both labor and final product markets are competitive 4. MP of labor is diminishing

6. Copyright © 2009 Pearson Education, Inc. 3- 6 Table 3.1: The Marginal Product of Labor in a Hypothetical Car Dealership (capital held Constant)

7. Copyright © 2009 Pearson Education, Inc. 3- 7

8. Copyright © 2009 Pearson Education, Inc. 3- 8 The Short-Run Labor Demand Curve Based on the SR profit maximization criteria for hiring inputs, the labor demand curve for the firm can be represented by the MP curve or the MRP curve If the labor and product markets are competitive, hire until: MRP = MP x P = W (nominal wage) or MP = W/P (real wage)

9. Copyright © 2009 Pearson Education, Inc. 3- 9 Figure 3.1: Demand for Labor in the Short Run (Real Wage)

10. Copyright © 2009 Pearson Education, Inc. 3- 10 Table 3.2: Hypothetical Schedule of Marginal Revenue Productivity of Labor for Store Detectives

11. Copyright © 2009 Pearson Education, Inc. 3- 11 Figure 3.2: Demand for Labor in the Short Run (Money Wages)

12. Copyright © 2009 Pearson Education, Inc. 3- 12 Long-Run Demand for Labor Characteristics of Isoquants: 1.Although each isoquant represents a unique level of output,each point on an individual isoquant represents the same level of output 2.Isoquants have negative slopes 3.Isoquants are convex 4. The slope of an isoquant is called the Marginal Rate of Technical Substitution

13. Copyright © 2009 Pearson Education, Inc. 3- 13 Figure 3A.1: A Production Function

14. Copyright © 2009 Pearson Education, Inc. 3- 14 The Isoexpenditure Curve Let: TE = wL + cK w = wage, L = labor input, c = capital expense, K = capital input and TE = Total expenditures on inputs Then: K = TE/c - w/c x L and the equation for isoexpenditure curve B is: K = 1,500/20 - 10/20 x L = 75 -.5L

15. Copyright © 2009 Pearson Education, Inc. 3- 15 Figure 3A.3: Cost Minimization in the Production of Q * (Wage = $10 per Hour; Price of a Unit of Capital = $20)

16. Copyright © 2009 Pearson Education, Inc. 3- 16 Cost Is Minimized in the Long Run Where: An isoexpenditure curve is tangent to an isoquant MRTS = - MPL/MPk = - W/C or W/MPL = C/MPC, where W = wage, MPL = marginal product of labor C = capital expense, MPC = marginal product of capital

17. Copyright © 2009 Pearson Education, Inc. 3- 17 Substitutes in Production Complements in Production Gross Substitutes Gross Complements Important Definitions - Multiple Inputs

18. Copyright © 2009 Pearson Education, Inc. 3- 18 Figure 3.3: Effect of Increase in the Price of One Input (k) on Demand for Another Input (j), where Inputs Are Substitutes in Production

19. Copyright © 2009 Pearson Education, Inc. 3- 19 When Product Markets Are Not Competitive, The Profit Maximization Condition Becomes : MRP = MP x MR = W Because MR < P, the labor demand curve of a price maker in the product market lies to the left of the labor demand curve of a price taker in the product market.

20. Copyright © 2009 Pearson Education, Inc. 3- 20 Figure 3.4: The Market Demand Curve and Effects of an Employer-Financed Payroll Tax

21. Copyright © 2009 Pearson Education, Inc. 3- 21 Figure 3.5: Payroll Tax with a Vertical Supply Curve