1. The Labor Market Chapter 8 Copyright © 2011 by The McGraw-Hill Companies, Inc. All Rights Reserved.McGraw-Hill/Irwin

2. 8-2 Labor Supply The willingness and ability to work specific amounts of time at alternative wage rates in a given time period, ceteris paribus. LO-1

3. 8-3 Income versus Leisure The opportunity cost of working is the amount of leisure time that must be given up in the process: –Opportunity cost is the most desired goods or services that are forgone in order to obtain something else. LO-1

4. 8-4 Market Supply Market supply of labor–the total quantity of labor that workers are willing and able to supply at alternative wage rates in a given time period, ceteris paribus. As labor-market entrants increase, the quantity of labor supplied goes up. LO-1

5. 8-5 Labor Demand Demand for labor–the quantities of labor employers are willing and able to hire at alternative wage rates in a given time period, ceteris paribus. LO-2

6. 8-6 Derived Demand The quantity of resources purchased by a business depends on the firm’s expected sales and output. The demand for labor depends on the demand for the product that the labor is producing. LO-2

7. 8-7 What does your major pay?

8. 8-8 The Wage Rate The quantity of labor demanded depends on its price—the wage rate. The farmer paying $30 an hour to labor may not hire as much labor as she would at $10 per hour. LO-3

9. 8-9 Figure 8.2

10. 8-10 Marginal Physical Product (MPP) Marginal physical product–the change in total output associated with one additional unit of an input: Marginal physical product= Change in total output Change in quantity of labor LO-3

11. 8-11 Marginal Revenue Product (MRP) Marginal revenue product–the change in total revenue associated with one additional unit of input: marginal revenue product=change in total revenue change in quantity of labor LO-3

12. 8-12 The Law of Diminishing Returns The Law of Diminishing Returns– The marginal physical product of a variable factor declines as more of it is employed with a given quantity of other (fixed) inputs. LO-3

13. 8-13 Figure 8.3

14. 8-14 Diminishing Marginal Revenue Product (MRP) As MPP diminishes, so does MRP. MRP = MPP x p If p is assumed to be constant, then MRP diminishes along with MPP. LO-3

15. 8-15 Table 8.1

16. 8-16 The Hiring Decision The number of workers that will be hired is determined by the demand for and the supply of labor. LO-3

17. 8-17 The Firm’s Demand for Labor A firm will continue to hire until the MRP has declined to the level of the market wage rate. The Marginal Revenue Product curve is the labor demand curve. LO-3

18. 8-18 Each (identical) worker is worth no more than the MRP of the last worker hired, and all workers are paid the same wage rate. The Firm’s Demand for Labor LO-3

19. 8-19 Figure 8.4

20. 8-20 Market Equilibrium The market demand for labor depends on: –The number of employers. –The Marginal Revenue Product of labor in each firm and the industry. The market supply of labor depends on: –The number of workers. –Each workers’ willingness to work at alternative wage rates. LO-3

21. 8-21 Legal Minimum Wages Minimum wages are mandated by Congress as a result of the FLSA (1938). Effects of a minimum wage: –Reduces the quantity of labor demanded. –Increases the quantity of labor supplied. –Creates a market surplus. –Some workers end up better off while others end up worse off (a tradeoff). LO-4

22. 8-22 Figure 8.7

23. 8-23 Labor Unions Workers may take collective action to get higher wages. They form a labor union and bargain collectively with employers. A union must exclude some workers from the market to get and maintain an above-equilibrium wage. LO-5

24. 8-24 Capping CEO Pay Critics of CEO (Chief Executive Officer) pay levels want to reduce their pay and revise the process used to set their pay levels. The Obama Administration created a Pay Czar position to govern salaries and benefits given to CEOs of firms bailed out during the 2008-09 economic problems. LO-5

25. End of Chapter 8