Labor Demand and Long-Run Costs

Flashcards covering labor demand, isoquants, isocosts, cost minimization, and elasticity of labor demand.

Marginal Product of Labor (MPE)

The amount of additional output produced by an additional worker.

Cost of Producing an Extra Unit of Output

MC = w / MPE, where w is the wage and MPE is the marginal product of labor.

Long-Run Profit Maximization

Requires choosing the number of workers and the amount of plant and equipment to invest in.

Isoquant

A curve showing combinations of labor and capital that produce the same level of output.

Properties of Isoquants

Downward sloping, do not intersect, higher isoquants represent higher output levels, convex to the origin.

Marginal Rate of Technical Substitution (MRTS)

The absolute value of the slope of an isoquant, representing the rate at which a firm can substitute between labor and capital while holding output constant.

Isocost Line

A line showing combinations of labor and capital that have the same total cost.

Slope of Isocost Line

-w/r, where w is the wage rate and r is the rental rate of capital.

Cost Minimization

Producing a given level of output at the lowest possible cost, where the isocost line is tangent to the isoquant.

Condition for Cost Minimization

MPE / w = MPK / r, where MPE and MPK are the marginal products of labor and capital, respectively, and w and r are their respective prices.

Long-Run Profit Maximization

Requires w = p * MPE and r = p * MPK, where p is the price of output.

Scale Effect

The change in input demand resulting from a change in output, holding input prices constant.

Substitution Effect

The change in input demand resulting from a change in input prices, holding output constant.

Long-Run Elasticity of Labor Demand (ELR)

(% change in employment) / (% change in wage). It must be negative.

Relationship Between Short-Run and Long-Run Labor Demand Elasticity

The long-run demand curve for labor is more elastic than the short-run demand curve.

Estimates of Short-Run Labor Demand Elasticity

Typically between -0.4 and -0.5.

Estimates of Long-Run Labor Demand Elasticity

Clusters around -1.