1. How many hours of labor would firms hire (the quantity demanded), if the wage were $____ per hour, given that everything else relevant to the demand for labor remains the same. Labor Markets Question: What are the two essential elements of every market? Demand Wage ($/hour) Labor (hours) S D L* w* In equilibrium: Quantity of labor demanded Quantity of labor supplied equals Market Demand Curve for Labor: Question: Where does the market demand curve for labor come from? Wage L DADA D DBDB L L 10 20 30 40 1020 3040 10 20 30 40 10 20 30 40 Claim: The market demand curve or labor is the horizontal sum of each firm’s individual demand curve for labor Firm AFirm B How many hours of labor would Firm A hire if the wage were $____ per hour, given that …? How many hours of labor would Firm B hire if the wage were $____ per hour, given that …? Labor Market If w = Supply

2. Question: Where does and individual firm’s demand curve for labor come from? How much labor will a firm hire? Firm’s Goal: Marginal Revenue Product of Labor (MRP L ) = Change in the firm’s total revenue resulting from hiring one more or one less hour of labor. Marginal Expense of Labor (ME L ) = Change in the firm’s total cost resulting from hiring one more or one less hour of labor. Scenario 1: Suppose thatMRP L = $50ME L = $30  If one more hour of labor were hired TR would increase by $50  If one more hour of labor were hired TC would increase by $30  Total Revenue Total Cost  Up by $50  Up by $30 Profit=  Up by $20 Generalizing: MRP L > ME L MRP L = $20ME L = $30  If one less hour of labor were hired TR would decrease by $20  If one less hour of labor were hired TC would decrease by $30  Down by $20  Down by $30  Up by $10  Less labor increases profit  More labor increases profit MRP L < ME L  Profit maximized MRP L = ME L Strategy: A closer look atMarginal Expense of Labor (ME L ) Marginal Revenue Product of Labor (MRP L ) Scenario 2: Suppose that

3. Marginal Expense of Labor (ME L ) Marginal Expense of Labor (ME L ) = Change in the firm’s total cost resulting from hiring one more or one less hour of labor. ME L = Wage w L 10 20 30 40 Firm A If w = ME L = $10 If w = ME L = $20 If w = ME L = $30 If w = ME L = $40 Marginal Revenue Product of Labor (MRP L ) Marginal Revenue Product of Labor (MRP L ) = Change in the firm’s total revenue resulting from hiring one more or one less hour of labor. Marginal Product of Labor (MP L ) = Change in the firm’s output resulting from hiring one more or one less hour of labor. Marginal Revenue (MR) = Change in the firm’s total revenue resulting from a one can change in beer production. Claim:A firm’s marginal revenue product of labor (MRP L ) equals its marginal product of labor (MP L ) times marginal revenue (MR). MRP L = MP L  MR Question: If a firm hires a worker for one additional hour, by how much will it’s costs rise? Answer: An amount equal to the wage.

4. Marginal Revenue Product of Labor (MRP L ) Marginal Revenue Product of Labor (MRP L ) = Change in the firm’s total revenue resulting from hiring one more or one less hour of labor. Marginal Product of Labor (MP L ) = Change in the firm’s output resulting from hiring one more or one less hour of labor. Marginal Revenue (MR) = Change in the firm’s total revenue resulting from a one can change in beer production. Claim:A firm’s marginal revenue product of labor (MRP L ) equals its marginal product of labor (MP L ) times marginal revenue (MR). MRP L = MP L  MR Suppose that the firm’s marginal physical product of labor is 6 cans for beer and marginal revenue equals $2 per can. MP L = 6 MR = $2 If one more hour of labor were hired  Beer production increases by 6 cans  Each additional can increases total revenue by $2 for a total of 6  $2 = $12 MP L = 6 MR = $2   Generalizing: MRP L = MP L  MR

5. Marginal Revenue Product of Labor (MRP L ) Curve Claim: The marginal revenue product of labor curve is a downward sloping curve; that is, as the firm hires more labor, the marginal revenue product of labor decreases. MP L L Firm A Q MR Monopoly:Perfect Competition: D q MR = P L up P  MP L down  Quantity up MR  Unchanged MRP L L Firm A MP L MRP L MRP L = MP L  MR  Down  Unchanged or down  Down MR  Down Question: What about marginal revenue? MR = PMR < P Question: Why is the marginal product of labor (MP L ) curve downward sloping? Answer: Diminishing marginal product of labor. (Remember Mr. Atkins’ apple orchard.)

6. How many hours of labor would firm A hire (the quantity demanded), if the wage were $____ per hour, given that everything else relevant to the demand for labor remains the same. Firm A’s Individual Demand Curve for Labor: Wage L MRP L 10 20 30 40 102030 40 Claim: Firm A’s individual demand curve for labor is its marginal revenue product of labor curve Firm A If w = MRP L curve is downward sloping ME L = Wage ME L = 10 ME L = 20 ME L = 30 ME L = 40 D MRP L > ME L  Less labor increases profit  More labor increases profit MRP L < ME L  Profit maximized MRP L = ME L Firm A’s Goal:Maximize Profit Pieces of the Puzzle:MRP L and ME L

7. Wage L D S L* w* Competitive Labor Market The equilibrium is determined by the market demand curve and market supply curve for labor. Market demand curve: The horizontal sum of each individual firm’s demand curve for labor. Since each individual firm’s demand curve for labor is downward sloping, the market demand curve for labor is downward sloping. Market supply curve: Upward sloping.

8. Tying Up a Loose End: Two Profit Maximizing Rules – How Are They Related? Rule #1 How much output should the firm produce? Rule #2 How much labor should the firm hire? MRMC=  Change in TR resulting from a 1 can change in the quantity of beer produced  Change in TC resulting from a 1 can change in the quantity of beer produced MRP L ME L =  Change in TR when 1 more or 1 less hour of labor is hired  Change in TC when 1 more or 1 less hour of labor is hired MP L = 6 cans of beer MR = $2 w = $12 MRP L = MP L  MR 6 = 2  $12 = ME L = w $12 = Question: What does MC equal? 1 more hour of labor is hired Firm produces 6 more cans TC increases by $12  If the firm produced 1 more can  TC would increase by $2   MC = $2 MP L = 6   ME L = $12 Numerical example Some calculations Rule 2 is being satisfied. Rule 1 is being satisfied. What about Rule 1?