1. Warm Up: staple/tape ½ sheet into notebook and answer questions.

2. The Labor Market The Laws of supply and demand affect resources just as much as they affect goods and services! All of the principles we applied to outputs we will apply to inputs. The MRP L curve will be affected if the output market changes. The MRC L curve will be affected if the input market changes.

3. What factors affect the Demand of Inputs? 1. Complements and Substitutes –Labor works more productively with more Capital Goods –However, capital goods can also replace Labor 2. Price of other Inputs –Labor intensive methods vs. capital intensive methods? Firms will utilize the optimal method of technology (cheapest).

4. What factors affect the Demand of Inputs? 3. Technology Change –New methods can alter the inputs demanded 4. Price of Output –Derived Demand!!! The demand for inputs is directly related to the demand for outputs… 5. Demand of Output –Derived Demand!!!

5. Input Demand Labor markets are competitive; the wages in those markets are determined by the interaction of the supply of the labor and the demand of the labor. Firms will hire workers only as long as the value of their product exceeds the relevant market wage.

6. Input Demand The Rule: A profit-maximizing firm (which is one that minimizes costs) will look for: –MRC L = MRP L (MP L × P X ) (remember: MRC L = P L ) –-OR- (mathematically equivalent) _MP L _ = _MP K _ = _MP A _ = _ 1__ P L P K P A P X

7. Law of Supply: –As the wage rate for labor increase, the quantity supplied will ___________________ –This Looks Like: Increase SLSL Quantity P Households are willing to supply more as wage paid increases Normal supply curve What factors affect the Supply of Inputs?

8. Abnormal Input Supply Curve X-axis – go out by 2s Y-axis – go up by 2s Backward Bending Supply WLWL Quantity of Labor Supplied $42 66 810 13 1216 1418 1618 16 2010 SLSL QLQL PLPL

9. Analyze What does this curve tell you? Why is it not “normal”? When/Why do you think this happens? As wage got higher households supplied less labor to market It is not infinitely positive, it bends backwards What types of people will choose less work if wage is higher?

10. Labor~Leisure Trade-Off Income from supplying labor enables workers to increase their ability to buy goods and services. However these workers might also like to have some leisure. Given a finite number of hours in a week in which to exercise an option to forego more consumption of goods and services, any additional hour of leisure consumed will mean one less hour of work.

11. Substitution Effect: Rule: –Households will substitute labor time for leisure. As the wage rate increases households choose work, they cannot afford to not work, the opportunity cost is too high.

12. Substitution Effect The normal supply curve is applicable to: Low-income, discriminated workers with low amounts of labor force experience Young, large families with many bills and debts QLQL PLPL SLSL Looks Like:

13. Income Effect Rule: households will choose leisure time over labor. Some households can afford free time and will choose not to work when offered a higher wage rate. The higher the wage offered, the less households will have to supply to earn the same income.

14. Income Effect The Backward Bending Curve is applicable to:  Workers who are older, more experienced and who have amassed some wealth, or paid off bills (mortgages, college loans, etc.) SLSL QLQL PLPL Looks Like: