1. The Labor Market © 2003 South-Western/Thomson Learning

2. Factor Markets in General Product Markets Markets in which firms sell goods and services to households or other firms

3. Factor Markets in General Factor Markets Markets in which resources - capital, land, labor, and natural resources - are sold to firms

4. Product and Factor Markets Households Firms S D S D Demand for Goods and Services Supply of Goods and Services Demand for Resources Supply of Resources Factor Markets Product Markets

5. Labor Markets in Particular Defining a Labor MarketDefining a Labor Market Competitive Labor MarketsCompetitive Labor Markets Firms in Labor MarketsFirms in Labor Markets

6. Labor Markets in Particular Perfectly Competitive Labor Market Market with many indistinguishable sellers of labor and many buyers, and that involves no barriers to entry or exit

7. Labor Markets in Particular Labor markets are perfectly competitive if: 1)There are many buyers (firms) and sellers (households) of labor 2)All workers appear the same to firms 3) No barriers to entering/exiting the labor market

8. Labor Markets in Particular Demand side of a labor market includes all firms hiring labor in that labor market –the firms may or may not compete in the same market

9. Demand for Labor by a Single Firm Goals and ConstraintsGoals and Constraints The Firm’s Employment Decision When Only Labor Is VariableThe Firm’s Employment Decision When Only Labor Is Variable The Firm’s Employment Decision When Several Inputs Are VariableThe Firm’s Employment Decision When Several Inputs Are Variable

10. Demand for Labor by Single Firm Derived Demand The demand for an input that arises from, and varies with, the demand for the product it helps to produce

11. Goals and Constraints Wage Taker In competitive labor markets, each firm is a wage taker: it takes the market wage rate as a given.

12. Goals and Constraints The firm faces three constraints in deciding how much labor to employ: 1.Its technology 2.The market price 3.The market wage rate

13. Goals and Constraints Marginal Revenue Product (MRP) The change in revenue from hiring one more worker

14. The Profit-Maximizing Employment Level Marginal approach to profit: a firm should take any action that adds more to its revenue than to its costMarginal approach to profit: a firm should take any action that adds more to its revenue than to its cost Hire another worker when MRP > WHire another worker when MRP > W Do not hire another worker when MRP < WDo not hire another worker when MRP < W

15. The Profit- Maximizing Employment Level 2 Number of Workers Dollars $200 MRP 1345678 150 60 50 100 Wage

16. The Firm’s Labor Demand Curve aa a n 1 Number of Workers Dollars Firm’s Labor Demand Curve n 2 W 2 W 1 W 2 W 1 B A

17. The Firm’s Labor Demand Curve aa a n 1 Number of Workers Dollars Firm’s Labor Demand Curve n 2 W 2 W 1 W 2 W 1 n 3 MRP 1 B 2 C A

18. The Firm’s Labor Demand Curve Market Labor Demand Curve Curve indicating the total number of workers all firms in a labor market want to employ at each wage rate

19. The Firm’s Labor Demand Curve aaaa 100 Number of Workers Hourly Wage Hourly Wage Hourly Wage Hourly Wage d 80 Number of Workers Number of Workers Number of Workers L D N 2 = 80 + 40 + 30 +... N 1 = 100 + 50 + 90 +... $12 10 Firm AFirm BFirm C Labor Market 40503090 $12 10 d d

20. Shifts in the Market Labor Demand Curve

21. Complementary Input An input whose utilization increases the marginal product of another input

22. Shifts in the Market Labor Demand Curve Substitute Input An input whose utilization decreases the marginal product of another input

23. Shifts in the Market Labor Demand Curve

24. Change in Technology When many firms acquire a new technology, the market labor demand curve willWhen many firms acquire a new technology, the market labor demand curve will –shift rightward if the technology is complementary with labor –shift leftward if the technology is substitutable for labor

25. Change in Price of Other Inputs When the price of some other input decreases, the market labor demand curve may shiftWhen the price of some other input decreases, the market labor demand curve may shift –rightward if the input is complementary with labor –leftward if the input is substitutable for labor

26. Labor Supply Individual Labor SupplyIndividual Labor Supply Market Labor SupplyMarket Labor Supply Shifts in the Market Labor Supply CurveShifts in the Market Labor Supply Curve Short-Run versus Long-Run Labor SupplyShort-Run versus Long-Run Labor Supply

27. Labor Supply Reservation Wage The lowest wage rate at which an individual would supply labor to a particular labor market

28. Market Labor Supply Labor Supply Curve Curve indicating the number of people who want jobs in a labor market at each wage rateCurve indicating the number of people who want jobs in a labor market at each wage rate –the higher the wage rate, the greater the quantity of labor supplied

29. Market Labor Supply Curve

30. Shifts in the Market Labor Supply Curve A market labor supply curve will shift when –something other than a change in the wage rate causes a change in the number of people who want to work in a particular market

31. Shifts in the Market Labor Supply Curve A market labor supply curve will shift when –there is a change in the market wage rate in other labor markets –there are changes in the cost of acquiring human capital –there are changes in population –there are changes in tastes

32. Short-Run vs. Long-Run Labor Supply Long-Run Labor Supply Curve Curve indicating how many (qualified) people will want to work in a labor market after full adjustment to a change in the wage rate

33. Long-Run Labor Supply Curve Fig 9, animated aa a 30,00060,00090,000Number of Workers Hourly Wage 25 $40 L 1 S L LR S L 2 S B A C

34. Labor Market Equilibrium

35. What Happens When Things Change? A Change in Labor DemandA Change in Labor Demand A Change in Labor SupplyA Change in Labor Supply Labor Shortages and SurplusesLabor Shortages and Surpluses

36. A Change in Labor Demand In the short run, a shift in labor demand moves along a short-run labor supply curve In the long run, the resulting increase in wage rate will cause the short-run labor supply curve to shift also

37. A Change in Labor Demand aa a aaa aa a 5,000 Number of Workers Hourly Wage 8,000 12,000 30 $40 L 2 S L 1 D L 2 D Number of Workers (a) Labor Market (b) Typical Firm W 1 W 3 W 2 5080120 Dollars 20 30 $40 20 L 1 S C 1 d 2 d A B c b a

38. A Change In Labor Supply Labor Shortage The quantity of labor demanded exceeds the quantity supplied at the prevailing wage rate

39. A Change in Labor Supply Labor Surplus The quantity of labor supplied exceeds the quantity demanded at the prevailing wage rate