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]]Labor input (workers/hour)]] | ]]Total product (cups/hour)]] | ]]Marginal product (MPl)]] | ]]Marginal revenue (MR=P)]] | ]]Marginal revenue product (MRPl= MPl x MR)]] |
---|---|---|---|---|
0 | 0 | |||
1 | 25 | 25 | $.50 | $12.50 |
2 | 45 | 20 | $.50 | $10.00 |
3 | 60 | 15 | $.50 | $7.50 |
4 | 70 | 10 | $.50 | $5.00 |
5 | 75 | 5 | $.50 | $2.50 |
6 | 70 | -5 | $.50 | -$2.50 |
7 | 60 | -10 | $.50 | -$5.00 |
If MB > MC, do more of it
If MB < MC, do less of it.
If MB = MC, stop here.
In the case of resource hiring, the marginal benefit is MRPL
The marginal cost of resource hiring is marginal resource cost (MRC)
MRC = Change in total resource cost/change in resource quantity = wage
The profit-maximizing employer of labor would hire to the point where MRPL (marginal revenue product per labor)= MRC (marginal resource cost) = Wage
]]Total labor input (workers/hour)]] | ]]Product (cups/hour)]] | ]]Marginal product]] | ]]Marginal revenue]] | ]]Marginal revenue product]] | ]]Marginal resource cost (MRC = wage)]] |
---|---|---|---|---|---|
0 | 0 | ||||
1 | 25 | 25 | $.50 | $12.50 | $7.50 |
2 | 40 | 20 | $.50 | $10.00 | $7.50 |
3 | 60 | 15 | $.50 | $7.50 | $7.50 |
4 | 70 | 10 | $.50 | $5.00 | $7.50 |
5 | 75 | 5 | $.50 | $2.50 | $7.50 |
6 | 70 | -5 | $.50 | -$2.50 | $7.50 |
7 | 60 | -10 | $.50 | -$5.00 | $7.50 |
Based on this chart, 3 workers would help maximize the profit for the lemonade stand MRPL as Demand for Labor
Employment and labor cost are inversely related
As labor cost increases, employment decreases, and vice versa
Based on the same chart above, if the wage rate rose to $10, then the lemonade owner would have to cut down to 2 employees to maximize profit
MRPL is downward sloping like any demand curve would be, because of the diminishing marginal productivity of labor in the short run
Demand for the overall market of labor is the sum of all of the individual firms’ MRPL curves: Market DL = SMRPL
Under the assumptions of a perfectly competitive labor market, the supply of labor to the individual firm
Hence the firms could employ all of the workers they desire at the going market wage
In competitive markets, MRPL is the firm’s downward-sloping labor demand curve
In competitive markets, wage is the firm’s horizontal labor supply curve
An increase in the demand for a resource means that at any wage, the firm wishes to employ more of that resource
↑D for product leads to ↑price of product which ↑MRPL. This in return ↑hiring of labor at the current wage
A. Substitution effect (SE)
B. Output effect (OE)
C. Net effect of a lower price of capital depends upon the magnitude of each effect
If SE > OE, demand for labor falls
If OE > SE, the demand for labor increases
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]]Labor demand increases if]] | ]]Labor demand decreases if]] |
---|---|
Demand for product increases, increasing the price | Demand for product decreases, reducing the price |
Labor becomes more productive, either with more resources availability, better technology or higher quality workforce | Labor becomes less productive, either with fewer resources availability, lessened technology or poor quality workforce |
Price of substitute resources falls and the OE > SE | Price of substitute resources falls and the OE < SE |
Price of substitute resources rises and the OE < SE | Price of substitute resources rises and the OE > SE |
Price of complementary resource falls | Price of complementary resource rises |
You must produce Q* units of output. Now find the least-cost ($TC) way of doing so.
You can only spend $TC. Now find the highest level of output (Q*)
MPl/Pl = MPk/Pk
Input is $1 per unit
MPL = 100 and the MPK = 10 at the current level of labor and capital
Increasing spending on labor by $1 would increase output by 100 units
That one extra dollar is coming from you spending one dollar less on capital
]]Situation]] | ]]Firm will]] | ]]Which causes]] | ]]And]] | ]]Until]] |
---|---|---|---|---|
MPl/Pl < MPk/PK | increase Labor and decrease capital | MPl falls | MPk rises | MPl/Pl = MPk/Pk |
MPl/Pl > MPk/PK | Increase capital and decrease labor | MPk falls | MPl rises | MPl/Pl = MPk/Pk |
Price of labor increases, more hours of labor should be supplied (supply increases) Wage and Employment Determination
Competitive wage is found at the intersection of labor demand and labor supply
The same concept would apply to even the market for capital
Assuming that the market is in perfect competition
MRPk = P x MPk
Demand for capital is also derived from the marginal revenue product of capital (MRPK)
The demand and supply operate as they normally do for any resource Imperfect Competition in Product and Factor Markets
Product market
Factor (labor) market
]]Labor supplied to firms]] | ]]Necessary hourly wage]] | ]]Total wage bill (Ls x W)]] | ]]Marginal factor cost (MFC)]] |
---|---|---|---|
0 | $0 | ||
1 | $4 | $4 | $4 |
2 | $5 | $10 | $6 |
3 | $6 | $18 | $8 |
4 | $7 | $28 | $10 |
5 | $8 | $40 | $12 |
6 | $9 | $54 | $14 |
Considering the same lemonade stand, the stall owner can employ more workers by increasing wage but she would have to do the same for all existing employees
Molly still chooses to employ where MRPL = MFC, but now wage is determined from the labor supply curve