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Chapter 28
Labor Demand and Supply
(How many laborers should a firm hire,
and at what wage?)
The Factor Market – Perfect
Competition
• In the factor market households supply their
labor, capital and natural resources in markets
that are perfectly competitive, or 1 of the
imperfect forms of competition.
• Perfect Competition:
– Supply of labor is perfectly elastic
– At equilibrium wage rate the firm can hire as many
laborer as it wants to
Marginal Physical Product
• (MPP) - ∆ in output that results from the
addition of 1 more worker
– Declines due to diminishing marginal returns
• Marginal Revenue Product: the incremental
•
worker’s contribution to the firm’s total revenue
Marginal Factor Cost: the wage rate of each
worker
• = ∆ in TC
(See pg. 677)
∆ in amount of resource used
- Wage rate = $830 In a PC market this is also the perfectly
elastic supply curve - firm can purchase all the labor it wants
at this wage
(Panel b)
Hiring Rule
• Hire to the point where add.’l cost of
hiring 1 more worker = add.’l revenue
generated by that worker
– For perfect competition this is = to wage rate = MRP
– Panel b p. 677 -
s drawn @ wage rate
d curve is the MRP
E is where the 2 intersect (MFC = MRP)
Derived Demand
• Labor demanded b/c it is used to produce
output that will be sold for a profit
• If the price of the product produced rises or falls,
the MRP will shift accordingly, & fewer or more
workers will be needed
Market Demand for Labor
(28-3 p. 681)
• $20 - 10 people - market supply of 2000
• Wage decrease to $10 means more hired up to
•
•
15
As firms hire more, supply increases & price of
the product will fall
(Panel a) MRP curve shifts L to d1 & each firm’s
labor increases to 15 - market Q is 3000
Determinants of Demand Elasticity
for Inputs
• % ∆ in Qd / % ∆ in price of labor
– Less than 1 = inelastic
– = 1 = unit-elastic
– More than 1 = elastic
• Determinants – greater if:
– Pe for final product is greater
– Input is easily substituted
– Larger proportion of total costs accounted for by a
particular variable input
– Longer time period being considered
Wage Determination
• Supply curve for labor sloped up for
industry
– Individual firm can hire all they want @ going
rates, (b/c the firm represents such a small
part of the market) – so the firm’s supply
curve for labor is perfectly elastic
– If industry wage rate goes up or down
surpluses & shortages are created, but
competition will again lead to an equilibrium
Other Wage Determination
Theories
• Efficiency Wages - higher-thancompetitive wage rates:
– Workers have more incentive to be productive
so they can keep their higher paying job
• Insiders Versus Outsiders:
– Current employees “with pull” create barriers
to entry for outsiders who are willing to work
for lower real wages
Shifts in Market Demand & Supply
of
Labor Curve Shifts:
• Demand
– ∆ in demand for final product shifts that market DC
for labor in the same direction
– ∆ in labor productivity shifts the labor DC in the same
direction, due to more capital, technological
improvements, etc.
– ∆ in P of a substitute input will cause demand for
labor to ∆ in same direction
– ∆ in P of complementary input will cause the D for
labor to ∆ in opposite direction
• Supply of Labor Determinants:
– ∆ in wage rates of another industry
– ∆ in working conditions in an industry
– Job flexibility
Monopoly in the Product Market
• For anything other than PC the DC for its
product is downward sloping
– P must fall to sell more
– MR is continuously falling
– Monopolist will continue to product as long as
additional profits are made, despite hiring more
workers
• Until wage rate = add.’l revenues (MRP)
– Monopolists hire fewer workers b/c they must account
for declining product price
Profit Maximization – Cost
Minimization
• Profit-maximizing combination of resources:
– MRP of labor = price of labor
– MRP of capital = price of capital
– MRP of land = price of land
• Cost minimization:
– MPP of labor = MPP of capital = MPP of land
price of labor price of capital
price of land