Download because if we know the firm`s chosen output, the level of labour

Topic 4 Lecture 18
Factor markets: The Labour market
Robin Naylor, Department of
Economics, Warwick
1
Topic 4 Lecture 18
In previous material (running through Topics 2 and 3) we have focused on the
question: “What determines the firm’s choice of output?”
We now ask the question is: “What determines the firm’s demand for labour?”
[The two questions are clearly related – because if we know the firm’s chosen
output, the level of labour demand should follow from the production function,
which links labour employed to output produced.]
Our answer to this question is that the profit-maximising firm will employ
labour up to the level at which the addition to the firm’s total revenue (from
the sale of the extra units produced when the firm takes on an extra unit of
labour) is just equal to the addition to the firm’s total costs incurred by
employing the extra unit of labour.
I.e., the profit-maximising employment rule is to employ an amount of Labour
such that:
Marginal Revenue Product of Labour = Marginal Cost of Labour.
Robin Naylor, Department of
Economics, Warwick
2
Topic 4 Lecture 18
Marginal Revenue Product of Labour = Marginal Cost of Labour.
What is the Marginal Revenue Product of Labour (MRPL)?
What is the Marginal Cost of Labour (MCL)?
If the product market is perfectly competitive, then:
MRPL = ?
If the labour market is perfectly competitive, then:
MCL = ?
Robin Naylor, Department of
Economics, Warwick
3
Topic 4 Lecture 18
Marginal Revenue Product of Labour = Marginal Cost of Labour.
What is the Marginal Revenue Product of Labour (MRPL)?
What is the Marginal Cost of Labour (MCL)?
If the product market is perfectly competitive, then:
MRPL = (MPPL) multiplied by (competitive market product price, p)
If the labour market is perfectly competitive, then:
MCL = unit cost of an extra unit of labour = wage rate
Robin Naylor, Department of
Economics, Warwick
4
Topic 4 Lecture 18
Consider the Marginal Revenue Product of Labour (MRPL)
MRPL
What does this
assume?
p.MPPL=MRPL
L
Robin Naylor, Department of
Economics, Warwick
5
Topic 4 Lecture 18
Consider the Marginal Cost of Labour (MCL)
MCL
What does this
assume?
Ls = w = MCL
L
Robin Naylor, Department of
Economics, Warwick
6
Topic 4 Lecture 18
Consider MCL and MRPL together
MCL
MRPL
What is the firm’s
chosen level of
employment? Why?
Ls = w = MCL
MRPL
L
Robin Naylor, Department of
Economics, Warwick
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Topic 4 Lecture 18
Consider MCL and MRPL together
MCL
MRPL
What happens to
the firm’s chosen
Ls = w = MCL level of
employment if
the competitive
wage shifts up?
MRPL
L*
Robin Naylor, Department of
Economics, Warwick
L
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Topic 4 Lecture 18
Consider MCL and MRPL together
MCL
MRPL
Ls = w2 = MCL2
Ls = w = MCL
MRPL
L*2
L*
Robin Naylor, Department of
Economics, Warwick
L
What do you
conclude about
the firm’s
demand for
labour?
9
Topic 4 Lecture 18
We have assumed perfect competition in both product
and labour markets.
MCL
MRPL
Ls = w = MCL
MRPL
L
How is the analysis different for a monopolist?
Robin Naylor, Department of
Economics, Warwick
10
Topic 4 Lecture 18
We have assumed perfect competition in both product
and labour markets.
MCL
MRPL
Ls = w = MCL
MRPL
MRPL (monopoly)
L
How is the analysis different for a monopolist?
The answer is that product price is higher, but now falls as X (and hence L)
increase. What does this do to the MRPL curve of the monopolist?
Robin Naylor, Department of
Economics, Warwick
11
Topic 4 Lecture 18
We have assumed perfect competition in both product
and labour markets.
MCL
MRPL
Ls = w = MCL
MRPL
L
How is the analysis different for a monopsonist?
Consider the next slide . . .
Robin Naylor, Department of
Economics, Warwick
12
Topic 4 Lecture 18
How is the analysis different for a monopsonist?
MCL
MRPL
Ls
dw
MRPL
L1 L1+1
Robin Naylor, Department of
Economics, Warwick
L
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Topic 4 Lecture 18
How is the analysis different for a monopsonist?
MCL
MRPL
Ls
dw.L1
dw
MRPL
L1 L1+1
Robin Naylor, Department of
Economics, Warwick
L
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Topic 4 Lecture 18
How is the analysis different for a monopsonist?
MCL
MCL
MRPL
Ls
dw.L1
dw
MRPL
L1 L1+1
Robin Naylor, Department of
Economics, Warwick
L
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Topic 4 Lecture 18
What happens with the introduction of a Minimum Wage (MWL) under
perfectly competitive markets? (Then we’ll contrast this with Monopsony)
MCL
MRPL
Ls
wC
MRPL=Ld, in a perfectly
competitive labour market
LC
Robin Naylor, Department of
Economics, Warwick
L
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Topic 4 Lecture 18
What happens with the introduction of a Minimum Wage (MWL) under
perfectly competitive markets? (Then we’ll contrast this with Monopsony)
MCL
MRPL
Ls
wmin
wmin
wC
MRPL=Ld, in a perfectly
competitive labour market
LREG
LC
Robin Naylor, Department of
Economics, Warwick
L
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Topic 4 Lecture 18
What happens with the introduction of a Minimum Wage (MWL) under a
monopsonist?
MCL
MCL
MRPL
Ls
wM
MRPL
LM
LC
Robin Naylor, Department of
Economics, Warwick
L
18
Topic 4 Lecture 18
What happens with the introduction of a Minimum Wage (MWL) under a
monopsonist?
MCL
MCL
MRPL
Ls
The minimum
wage is
introduced
wmin
wM
MRPL
LM
LC
Robin Naylor, Department of
Economics, Warwick
L
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Topic 4 Lecture 18
What happens to the Labour Supply curve with the introduction of a Minimum
Wage (MWL) under a monopsonist?
The labour
MCL supply curve is
MCL
unaffected in
this region . . .
MRPL
Ls
. . . but is
affected in this
region
wmin
wM
MRPL
LM
LC
L
LCRIT
Robin Naylor, Department of
Economics, Warwick
20
Topic 4 Lecture 18
What happens to the MCL curve with a Minimum Wage (MWL) under a monopsonist?
The MCL curve is unaffected in this region . . .
MCL
MCL
MRPL
Ls
. . . but is
affected in this
region
wmin
wM
MRPL
LM
LC
L
LCRIT
Robin Naylor, Department of
Economics, Warwick
21
Topic 4 Lecture 18
What happens to the Monopsonist’s chosen employment level with the
introduction of a Minimum Wage (MWL)?
MCL
MCL
MRPL
Ls
wmin
wM
MRPL
For L<LCRIT, how does
MRPL compare with
MCL? And therefore . . . ?
LM
For L>LCRIT, how does
MRPL compare with
MCL? And therefore . . . ?
LC
L
LCRIT
What do you conclude happens to employment with the introduction of a Minimum Wage
under Monopsony?
Robin Naylor, Department of
22
Economics, Warwick
Topic 3:
Lecture 18
Now read B&B 4th Ed., pp. 475-479, 400-408, 409-412.
You might also consult:
• Frank, Chapters 14-15
• Estrin, Laidler and Dietrich, Chapter 18
• Morgan, Katz and Rosen, Chapter 10.2
Robin Naylor, Department of
Economics, Warwick
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