ECON2800 Labour Economics

Flashcard set for labour economics

Characteristics of Labour Markets with Free Labour

• Labour suppliers are also consumers

• We care about the welfare of labour suppliers

• One cannot whole-sell your lifetime labours

• People invest in themselves to earn a higher price

• Legal & social constraints on moving labours across country & region borders

Government regulations that affect the labour market

• Minimum wages

• Mandated parental leaves

• Occupational health & safety

• Unemployment insurance

• Overtime pay

Agents of the Labour Market

• Firms

• Workers

• Government

Labour Suppliers

Workers

Labour Demanders

Firms

Capital (K)

Equipment, buildings, materials

Production Function

Y = f(K,L)

Cobb-Douglas Production Function

Constant Marginal Returns for Labour

Constant Marginal Product for Labour

Diminishing Marginal Returns for Labour

Diminishing Marginal Product for Labour

Short Run

• Firms are price takers

• Cannot change capital input

• Can change labour input

Marginal Product Formula

Profit Maximising Condition

Marginal Revenue = Marginal Cost

If (short run) Marginal Revenue is greater than Marginal Cost

Increase Labour

If (short run) Marginal Revenue is lesser than Marginal Cost

Decrease Labour

How to find the profit max in the short run

Solve for where the FOC of the profit max formula equals zero

Wage

Marginal Cost

Derivative (FOC) of the Profit Max Formula

Marginal Revenue

When wages decrease, firms should increase/decrease labour

Increase

When the output price decreases, firms should increase/decrease labour

Decrease

What happens when wages decrease (firm vs industry)

Every firm produces more; supply curve shifts right; lowers output price for industry

Elasticity of Labour Demand

In the long run, firms can

• Adjust capital stocks

  • Choose capital AND labour to max profits

Marginal Product of Labour

Derivative of Production Function wrt L

Marginal Product of Capital

Derivative of Production Function wrt K

Iso

Same

Characteristics of Isoquant Curves

• Shows different combinations to produce the same quantity

• Do not intersect

• Downward Sloping

• Convex to the origin

Characteristics of Isocost Lines

• Shows different combinations for the same total cost

• Budget lines

Formula for an Isocost Line

C = rK + wL

Slope of an Isocost line

-w/r

Cost Minimisation Condition

When the Isoquant curve is tangent to the Isocost line

How to Profit Max in the Long Run

Find the FOCs of the profit formula wrt L and K separately. Make them equal 0 and solve for L and K

Profit Formula

Labour Demand Curves are more/less elastic in the long run

More

Labour Demand Curves are more/less elastic in the short run

Less

Perfect Substitutes Isoquant

Perfect Complements Isoquant

Perfect Substitutes Production Formula

Perfect Complements Production Formula

Elasticity of Substitution (p) Formula

Elasticity of Perfect Substitutes

Elasticity of Perfect Complements Formula

Labour Force

Employed + Unemployed (but looking)

Unemployment Rate

Unemployed / Labour Force

Participation Rate

Labour Force / Working-age Population

Employment to Population Ratio

Employed / Working-age Population

U = f(C,L)

Utility function of consumption and leisure

MUc

Marginal Utility of Consumption

MUl

Marginal Utility of Leisure

MRS formula

Slope of the Indifference Curve

Workaholic Indifference Curve

• Flatter

• Gives up more leisure to consume a little more

Laid-back Indifference Curve

• Steeper

• Gives up more consumption for more leisure

Budget Constraint

T

Total Time

L

Leisure in Time

C

Consumption

w

Wage

What happens to the budget line as wage increases

Budget Line becomes steeper, but max leisure time remains the same

Utility Maximising Consumption-Leisure Choice

When the indifference curve is tangent to the budget line, and w = MRS

Budget Line formula with non-labour income

Budget Line with non-labour income

Normal Good

Consumed more as their income increases

Inferior Good

Consumed less as income increases

Graph of Leisure as a Normal Good

Graph of Leisure as an Inferior Good

Wage increases effect choices depending on which of the following dominates

• Income Effect

• Substitution Effect

Income Effect

People will work less to increase leisure time; leisure is a normal good

Substitution Effect

People will work more as the opportunity cost of leisure is higher; they will spend on consumption over leisure, as it is comparatively cheaper