2. Labor Markets Supply and Demand

3. Wages  Wage = Price of labor including fringe benefits  Real wage = adjustment for inflation

7. Labor Demand = the relationship b/n the quantity of labor demanded by firms and wage  Derived Demand = demand for an input is derived from demand for the product produced with that input  If employing another worker increases profit, that worker will be hired (MRP = Wage)

8. Determining the Demand Curve (Within a Competitive Firm) Product market reminders! MP = Marginal Product is drawn as… MP creates the principle of…. A firm will produce where… TR = The additional quantity produce from the addition of one more worker (input) P x Q MR = MC Diminishing Marginal Returns Input Output

9. Marginal Revenue Product of Labor  MPL = increase in quantity produced when labor increased by one unit  MRP = increase in Total Revenue when labor increased by one unit Change in Total Revenue when one additional unit of labor is employed Change TR or P x MP of Labor (MPL) Change L

10. How many workers should a firm hire? A firm will hire workers such that MRP = Wage (if no fractional unit, then when MRP > Wage)

11. Demand Curve for Labor  Downward sloping Derived from downward sloping MRP curve  As wage decreases quantity labor demanded increases Movements along the curve  Shifts occur because of two reasons Change in the Price of the good produced Change in the MP of labor * MRP = MP x P

12. How does this apply to firms with Market Power?  Same concept Price and output still inversely related MRP declines more sharply  MRP = MR x MP Firm is not a price taker

14. Labor Supply Substitution Effect Higher the wage, the more attractive work is to the alternatives Q of Labor Wage Labor Supply Income Effect The higher the wage, the less hours worked to earn the same amount Q of Labor Wage Labor Supply What would it look like if Substitution Effect = Income Effect?

15. Backward Bending Labor Supply Curve Income and Substitution effect cancel out Substitution Effect Dominates Income Effect dominates in this region Q of Labor Wage

17. Discrimination in the Labor Market  Firms that discriminate pay less than Marginal Product of Labor Labor Supply Actual Marginal Revenue Product Firms acts as if MRP is lower than it is Wage Number of Minority Workers

18. Minimum Wage Labor Supply Labor Demand Unskilled Workers Q of Labor Labor Demand Labor Supply Skilled Workers Q of Labor Wage

19. Labor Unions Two suggested reasons why wages are higher for those in a union  Restricted Supply  limit membership – shifts labor supply leftward raising wages  Increased Productivity  provide a way to improve relations w/in work place  more productive worker = higher wages

20. What would this graph look like?

21. Monopsony & Bilateral Monopoly  Monopsony = a single buyer of a particular good/service in a market  Bilateral Monopoly = one buyer and one seller in a market