1. Copyright © 2009 Pearson Education, Inc. 3- 1 Topic 2. Chapters 3 & 4 The Demand for Labor

2. Copyright © 2009 Pearson Education, Inc. 3- 2 In the short run, a firm demand workers where MRP L (marginal revenue product) = w (money wage) MP L (marginal product) x P (price of output) = w MP L = w/P (real wage) in a competitive market. A Competitive Firm’s Demand for Labor in the Short Run

3. Copyright © 2009 Pearson Education, Inc. 3- 3 Supervisors Output (Q) MP L MRP L (P =$.50) w/P 0 1,000 --- --- ---- 1 4,800 2 8,000 3 9,500 4 10,200 5 10,600 Example

4. Copyright © 2009 Pearson Education, Inc. 3- 4 Supervisors Output (Q) MP L MRP L (P =$.50) w/P 0 1,000 --- --- ---- 1 4,800 3,800 1,900 2 8,000 3,200 1,600 3 9,500 1,500 750 4 10,200 700 350 5 10,600 400 200 Example

5. Copyright © 2009 Pearson Education, Inc. 3- 5 Table 3.2: Hypothetical Schedule of Marginal Revenue Productivity of Labor for Store Detectives

6. Copyright © 2009 Pearson Education, Inc. 3- 6 Figure 3.2: Demand for Labor in the Short Run (Money Wages)

7. Copyright © 2009 Pearson Education, Inc. 3- 7 Figure 3.1: Demand for Labor in the Short Run (Real Wage)

8. Copyright © 2009 Pearson Education, Inc. 3- 8 Figure 3.3: Effect of Increase in the Price of One Input (k) on Demand for Another Input (j), where Inputs Are Substitutes in Production

9. Copyright © 2009 Pearson Education, Inc. 3- 9 In the long run, a firm demand workers where MP L / MP K = w/r where w is wage and r is interest rate (price of capital) *Why? MP L x P = w (A) MP K x P = r (B)  (A)/(B) MP L / MP K = w/r A Competitive Firm’s Labor Demand in the Long Run

10. Copyright © 2009 Pearson Education, Inc. 3- 10 Figure 3A.1: A Production Function

11. Copyright © 2009 Pearson Education, Inc. 3- 11 Figure 3A.3: Cost Minimization in the Production of Q * (Wage = $10 per Hour; Price of a Unit of Capital = $20)

12. Copyright © 2009 Pearson Education, Inc. 3- 12 Figure 3A.4: Cost Minimization in the Production of Q * (Wage = $20 per Hour; Price of a Unit of Capital = $20)

13. Copyright © 2009 Pearson Education, Inc. 3- 13 Figure 3.4: The Market Demand Curve and Effects of an Employer-Financed Payroll Tax

14. Copyright © 2009 Pearson Education, Inc. 3- 14 Figure 4.1: Relative Demand Elasticities

15. Copyright © 2009 Pearson Education, Inc. 3- 15 Figure 4.2: Different Elasticities along a Demand Curve

16. Copyright © 2009 Pearson Education, Inc. 3- 16 Figure 4.3: Federal Minimum Wage Relative to Wages in Manufacturing, 1938-2007

17. Copyright © 2009 Pearson Education, Inc. 3- 17 Figure 4.4: Minimum Wage Effects: Growing Demand Obscures Job Loss

18. Copyright © 2009 Pearson Education, Inc. 3- 18 Figure 4.5: Minimum Wage Effects: Incomplete Coverage Causes Employment Shifts