chapter 11: the labour market

Derived demand

demand for an input derives from the demand for the stuff that that input produces

Scale effect

price of capital good decreases, can produce at larger scale, hire more workers, labour demand increases

Substitution effect (LD)

price of capital good decreases, workers replaced with chepare machinery, labour demand decreases

Income effect

wage increases, higher income, want more leisure, work less

Substitution effect (LS)

wage increases, more incentive to work, work more

Labour supply

the time you spend working in the marker

Marginal product of labour

the extra production that occurs from hiring an extra worker

Marginal revenue product

measures the marginal revenue from hiring an additional worker,

Rational rule for employers

hire more workers if the marginal revenue product is greater than or equal to the wage

Rational rule for workers

work another hour if the wage is greater than or equal to the marginal benefit of another hour of leisure

factors that shift labour demand

changes in demand for final product

changes in price of other inputs (scale and substitution effects)

better management techniques and productivity

nonage benefits, subsidies, taxes (lower labour demand)

factors that shift labour supply

changes in wages in other occupations

changes in number of potential workers

changes in benefits of not working

nonage benefits, subsidies, taxes (increase labour supply)