Chapter 11 - Econ

Market for labor

input market (is determined by the output market), firms demand and households supply/ - it works like an output market

• wages and employment are determined by the intersection of downward-sloping labor demand and upward labor supply

• Wages are the price of labor

• hours worked or employment are Q

replace wage and quantity to better understand the shifts

demand curve

increase wage producers use less labor and produce/sell less stuff and vice versa

• is the law of demand in the labor market 

Supply Curve

higher wage attracts more workers 

• if wage is too low employees will take other jobs

• law of supply in the labor market 

• they must demand at the market wage. 

how many people to hire

competitive labor market → employers pay the market wage 

• calculate marginal cost and benefit of another worker

marginal product of labor (MPL)

extra production that occurs from hiring an extra worker

Marginal Revenue Product (MRPL)

the marginal revenue from hiring an extra worker

• MP * Price

Rational Rule for employers

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

• MRP = marginal benefit of the employee

• wage = marginal cost

• maximized profits in input markets

labor demand

marginal revenue product of labor 

• downward sloping because diminishing marginal product

• inelastic

labor demand shifts

• Change in demand for your product

  • Derived demand occurs because the demand for labor is derived from the demand for the stuff labor makes

• Changes in the price of capital

  • scale effect (output effect), when the price of capital declines you can produce output more cheaply so you need more workers to produce more things,

  • substitution effect, if you replace labor with capital, your need for workers will fall

• better management + productivity gain

  • marginal productivity rises, each worker is more productive, hire more workers to be more productive

• Non-wage benefits and taxes shift demand back

  • adds to cost of labor without influencing wage

impact of technology on labor demand

• increase wages create an incentive to invest in capital 

• new technology helps the owners of robots at the expense of the workers 

• technology leads to the end of some jobs (typists and fabricators) and the birth of others (engineers and programmers)

• increases in wages cause this to be developed in the long run to help reduce costs. 

Individual labor supply

trade off of labor and leisure

• opportunity cost of working is everything that you do when you aren’t working

• think at the margin to determine how many hours you work

• curve depends on the balance of income and substitution effects

• price goes up, supply more, more labor

rational rule for workers

work 1 more hours (marginal choice) as long as the wage is at least as large as the marginal benefit of another hour of leisure.

substitution effect

measures how many people respond to relative prices and says higher wages make work relatively more attractive

• direct opposition because it’s only 24 hours in a day

Income effect

measures how people respond to changes in income and says higher income makes ;eisure more attractive 

market supply curve

• can be straight up and down (don’t have control over the hours that you work) when the effects offset

• can look like a demand curve because you can cut back on our hours when making more (when you don’t like your job as much) when the income effect dominates 

• looks normal when the substitution effect dominates 

• it can also be bowed out )

  • at the top, higher wages, time is more scarce than money, so the income effect dominates

  • Income and substitution effect offset exactly

  • wage rises, the incentive to work rises, and substitution dominates

  • top half income effect, bottom half substitution

Choose whether to work or not

• consider the broad range of opportunity costs and benefits from working

• higher wages lead more people to enter the labor force choose an occupation

• apply the cost-benefit principle to figure out the right occupation 

• benefits→ love it, benefit, future, comparative advantage

• costs → risks, volatility, hours 

Individual labor supply shifters

• other loses of time (school)

• other sources of income (win lottery)

• need for more money (kids)

• need more “leisure” (kids)

• perks of job (nice place to work?)

• experience (internships)

• negative shifts it back, positives shift it out

Market labor supply curve slopes upwards because…

• new people may be induced to enter the work force as the wage rises

• existing workers put in more hours as the wage rises

• some people may switch occupations to those with higher wages

market labor supply curve shifts

• changing wages in other occupations

• changing number of potential workers

• changing benefits of not working

• nonwage benefits, subsidies and income taxes

Forecasting market equilibrium

1) which curve (or both) are shifting

2) is it an increase or decrease

3) how will wages and number of jobs change in the new equilibrium

perfectly competitive

when there are a lot of businesses looking to hire from a pool of many workers with similar skills.

leisure

normal good, the more income someone has the more of the normal good that they want.