Presentation is loading. Please wait.

Presentation is loading. Please wait.

LABOR DEMAND PROBLEM – How does an employer decide how many people to hire?

Published byLawrence Robinson Modified over 9 years ago

Similar presentations

Presentation on theme: "LABOR DEMAND PROBLEM – How does an employer decide how many people to hire?"— Presentation transcript:

1 LABOR DEMAND PROBLEM – How does an employer decide how many people to hire?

2  Basic Market Assumptions:  Firms want to maximize profits  Firms use (only) Labor and capital.  The only cost of hiring labor is the hourly wage  Labor and product markets are competitive  The firm is a price taker in both the Labor and Output Markets  Additional Assumption: Capital is Fixed  We are in the Short-RUN

3 How does an Employer Decide on the Number of Employees to Hire?  Marginal Analysis -  (Recall from Principles of Micro) MR=MC where MR – Marginal Revenue and MC – Marginal Cost  A Stepwise Manner  Hiring the First worker, second, etc, until MR=MC

4 How does an Employer Decide on the Number of Employees to Hire?  Another Equivalent Method:  Hire as long as MRP >=Wage  Where MRP is the marginal value of additional workers  MRP = P*MPL where P is the output’s price  So What Determines MPL:  Not Personal Characteristics  MPL depends on Capital (K) and Technology  Diminishing Marginal Returns (Diminishing Marginal Productivity)

5 How does an Employer Decide on the Number of Employees to Hire? NOTICE:  is defined as profits = TR - TC Watch Repairs LTPMPLMRPTRTC π MRMC 00. 144 2106 3155 4183 5202 619

6 How does an Employer Decide on the Number of Employees to Hire? Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Watch Repairs LTPMPLMRPTRTC π MRMC 00.. 144100 2106150 3155125 418375 520250 619-25 MRP = MPL * P

7 How does an Employer Decide on the Number of Employees to Hire? Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Watch Repairs LTPMPLMRPTRTC π MRMC 00.. 0 144100 2106150 250 3155125 375 418375 450 520250 500 619-25 475 TR = TP * P

8 How does an Employer Decide on the Number of Employees to Hire? Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Watch Repairs LTPMPLMRPTRTC π MRMC 00.. 0 100 144 160 2106150 250220 3155125 375280 418375 450340 520250 500400 619-25 475460 TC = TFC + TVC Where TVC = L * w TFC TVC

9 How does an Employer Decide on the Number of Employees to Hire? Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Watch Repairs LTPMPLMRPTRTC π MRMC 0 100 -100 100160 -60 250220 30 375280 95 450340 110 500400 100 475460 15 π = TR – TC Note that π is maximized when MRP = w or MR = MC

10 How does an Employer Decide on the Number of Employees to Hire? Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Watch Repairs LTPMPLMRPTRTC π MRMC -100-- -602515.00 302510.00 952512.00 1102520.00 1002530.00 1525-60.00

11 How does an Employer Decide on the Number of Employees to Hire? Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Watch Repairs LTPMPLMRPTRTC π MRMC 00--0100-100-- 144100 160-602515.00 2106150250220302510.00 3155125375280952512.00 4183754503401102520.00 5202505004001002530.00 619-254754601525-60.00 Maximum Profit at Hiring 4 workers

12 What does an Employer do when the price of Labor Decreases? Now Assume market wage is $40 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Watch Repairs LTPMPLMRPTRTC π MRMC 00--0100-100-- 144100 140-402510.00 210615025018070256.67 3155125375220155258.00 4183754502601902513.33 5202505003002002520.00 619-2547534013525-40.00 Maximum Profit at Hiring 5 workers

13 What does an Employer do when the price of Labor Increases? Now Assume market wage is $80 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Watch Repairs LTPMPLMRPTRTC π MRMC 00--0100-100-- 144100 180-802520.00 2106150250260-102513.33 3155125375340352516.00 418375450420302526.67 520250500 02540.00 619-25475580-10525-80.00 Maximum Profit at Hiring 3 workers

14 How does an Employer Decide on the Number of Employees to Hire? Conclusion: As Wages Decrease the Number of Workers Hired __________. As Wages Increase the Number of Workers Hired __________. increases decreases

15 How does an Employer Decide on the Number of Employees to Hire? Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Watch Repairs LTPMPLMRPTRTC π MRMC 00--0100-100-- 144100 160-602515.00 2106150250220302510.00 3155125375280952512.00 4183754503401102520.00 5202505004001002530.00 619-254754601525-60.00 Maximum Profit at Hiring 4 workers

16 What does an Employer do when the price of the Output Increases? Now Assume market wage is $60 per day and the (average) cost of a watch repair is $33 and total fixed cost is $100. Watch Repairs LTPMPLMRPTRTC π MRMC 00--0100-100-- 144132 160-283315.00 21061983302201103310.00 31551654952802153312.00 4183995943402543320.00 5202666604002603330.00 619-3362746016733-60.00 Maximum Profit at Hiring 5 workers

17 What does an Employer do when the price of the Output Decreases? Now Assume market wage is $60 per day and the (average) cost of a watch repair is $19 and total fixed cost is $100. Watch Repairs LTPMPLMRPTRTC π MRMC 00--0100-100-- 14476 160-841915.00 2106114190220-301910.00 31559528528051912.00 41835734234021920.00 520238380400-201930.00 619-19361460-9919-60.00 Maximum Profit at Hiring 3 workers

18 How does an Employer Decide on the Number of Employees to Hire? Conclusion: As Price of Output Decrease the Number of Workers Hired __Decreases__. As Price of Output Increase the Number of Workers Hired __Increases__.

19 How does an Employer Decide on the Number of Employees to Hire? Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Watch Repairs LTPMPLMRPTRTC π MRMC 00--0100-100-- 144100 160-602515.00 2106150250220302510.00 3155125375280952512.00 4183754503401102520.00 5202505004001002530.00 619-254754601525-60.00 Maximum Profit at Hiring 4 workers

20 What does an Employer do when the Fixed Cost Decreases? Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $80. Watch Repairs LTPMPLMRPTRTC π MRMC 00--080-80-- 144100 140-402515.00 2106150250200502510.00 31551253752601152512.00 4183754503201302520.00 5202505003801202530.00 619-254754403525-60.00 Maximum Profit at Hiring 4 workers

21 What does an Employer do when the Fixed Cost Increases? Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $120. Watch Repairs LTPMPLMRPTRTC π MRMC 00--0120-120-- 144100 180-802515.00 2106150250240102510.00 3155125375300752512.00 418375450360902520.00 520250500420802530.00 619-25475480-525-60.00 Maximum Profit at Hiring 4 workers

22 How does an Employer Decide on the Number of Employees to Hire? Conclusion: As Fixed Cost Decreases the Number of Workers Hired __Remains Unchanged__. As Fixed Cost Increases the Number of Workers Hired __Remains Unchanged__.

Download ppt "LABOR DEMAND PROBLEM – How does an employer decide how many people to hire?"

Similar presentations

Essential AP Microeconomics Formulas

Essential AP Microeconomics Formulas
Demand for Labor.

Demand for Labor.
At what Q is TR maximized? How do you know this is a maximum

At what Q is TR maximized? How do you know this is a maximum
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11: Managerial Decision in Competitive Markets.

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11: Managerial Decision in Competitive Markets.
Principles of Microeconomics - Chapter 1

Principles of Microeconomics - Chapter 1
AP Economics December 8, 2014 1.Review Unit 3 Exam: Theory of the Firm 2.Begin Unit 4: Factor Markets 3.Unit 4 Exam NEW DATE: Monday, December 22 and Tuesday,

AP Economics December 8, Review Unit 3 Exam: Theory of the Firm 2.Begin Unit 4: Factor Markets 3.Unit 4 Exam NEW DATE: Monday, December 22 and Tuesday,
Introduction to Labor Markets Chapter 3: Short-run labor demand.

Introduction to Labor Markets Chapter 3: Short-run labor demand.
1 Short-Run Costs and Output Decisions. 2 Decisions Facing Firms DECISIONS are based on INFORMATION How much of each input to demand 3. Which production.

1 Short-Run Costs and Output Decisions. 2 Decisions Facing Firms DECISIONS are based on INFORMATION How much of each input to demand 3. Which production.
Short-Run Costs and Output Decisions

Short-Run Costs and Output Decisions
Factor Markets: Factor Demand

Factor Markets: Factor Demand
1 Chapter 7 Production Costs Key Concepts Summary Practice Quiz Internet Exercises Internet Exercises ©2002 South-Western College Publishing.

1 Chapter 7 Production Costs Key Concepts Summary Practice Quiz Internet Exercises Internet Exercises ©2002 South-Western College Publishing.
The Firm in PC Labor Markets. Objective(s) 3. Students should be able to explain why a firm hires labor until MFC=MRPL and identify this point on a cost.

The Firm in PC Labor Markets. Objective(s) 3. Students should be able to explain why a firm hires labor until MFC=MRPL and identify this point on a cost.
1 Chapter 11 Practice Quiz Tutorial Labor Markets ©2000 South-Western College Publishing.

1 Chapter 11 Practice Quiz Tutorial Labor Markets ©2000 South-Western College Publishing.
Factor Markets Chapter 18.

Factor Markets Chapter 18.
Input Demand: Labor and Land Markets

Input Demand: Labor and Land Markets
Chapter 14 - Labor McGraw-Hill/Irwin Copyright © 2015 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 14 - Labor McGraw-Hill/Irwin Copyright © 2015 The McGraw-Hill Companies, Inc. All rights reserved.
Ch 18: The Markets For the Factors of Production What are the “factors of production”? Remember the circular flow model?????

Ch 18: The Markets For the Factors of Production What are the “factors of production”? Remember the circular flow model?????
Eco 6351 Economics for Managers Chapter 5. Supply Decisions

Eco 6351 Economics for Managers Chapter 5. Supply Decisions
1) “Price and wage takers” Price taking means, literally, that prices come as given for producers  perfect competition In words, with their actions, they.

1) “Price and wage takers” Price taking means, literally, that prices come as given for producers  perfect competition In words, with their actions, they.
Chapter 5 Section 2.  Marginal Product of Labor ◦ The change in output from hiring one additional unit of labor  Increasing Marginal Returns ◦ Workers.

Chapter 5 Section 2.  Marginal Product of Labor ◦ The change in output from hiring one additional unit of labor  Increasing Marginal Returns ◦ Workers.

Similar presentations

Ads by Google