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Applying Labor Demand
$
VMP = MPP x P
w1
L
L1
Lectures in Microeconomics-Charles W. Upton
From Firm Demand to
Market Demand
w
wo
D1
q1
Q
Applying Labor Demand
From Firm Demand to
Market Demand
w
wo
D1
q1 q2
D2
Q
Applying Labor Demand
From Firm Demand to
Market Demand
w
wo
Dm = D1 +D2
D1
D2
q1 q2 qApplying
Demand
m=qLabor
1+q
2
Q
Applications
• Short Run Labor Demand
Applying Labor Demand
Applications
• Short Run Labor Demand
– A change in wage rates
– A change in the price of the product
Applying Labor Demand
Applications
• Short Run Labor Demand
– A change in wage rates
– A change in the price of the product
• Long Run Labor Demand
Applying Labor Demand
Applications
• Short Run Labor Demand
– A change in wage rates
– A change in the price of the product
• Long Run Labor Demand
– A change in wage rates
– A change in the price of the product
Applying Labor Demand
A Change in the Wage Rate-Short
Run Labor Demand
• When the wage
rate is wo, Lo
workers are
demanded.
$
wo
Applying Labor Demand
Lo
L
A Change in the Wage Rate-Short
Run Labor Demand
• When the wage
rate is wo, Lo
workers are
demanded.
• When the wage
rate is w1, L1
workers are
demanded.
$
wo
w1
Applying Labor Demand
Lo
L1
L
A Change in the Wage Rate-Short
Run Labor Demand
• When the wage
rate is wo, Lo
workers are
demanded.
• When the wage
rate is w1, L1
workers are
demanded.
$
wo
w1
Applying Labor Demand
Lo
L1
L
A Change in the Wage Rate-Short
Run Labor Demand
• When the wage
rate is wo, Lo
In
short,arethe
workers
demanded.
lower
the wage
• When
wage
rate
thethe
greater
ratequantity
is w1, L1 of
the
workers
are
labor
demanded
demanded.
$
VMP = MPP x P
wo
w1
L
Applying Labor Demand
Lo L1
A Change in the Product PriceShort Run Labor Demand
• When the wage
rate is wo, Lo
workers are
demanded.
$
wo
Applying Labor Demand
Lo
L
A Change in the Product PriceShort Run Labor Demand
• When the wage
rate is wo, Lo
workers are
demanded.
• If the price rises
to P*, the VMP
curve shifts up
and to the right
$
VMP = MPP x P*
wo
Applying Labor Demand
Lo
L
A Change in the Product PriceShort Run Labor Demand
• When the wage
rate is wo, Lo
workers are
demanded.
• If the price rises
to P*, the VMP
curve shifts up
and to the right
$
wo
Applying Labor Demand
Lo
L1
L
A Change in the Product PriceShort Run Labor Demand
$
• When the wage
rate is wo, Lo
The
quantity
of
workers
are
wo
demanded.
labor
• If the
price rises
demanded
to
P*, the VMP
increases
to L1
curve shifts up
and to the right
Applying Labor Demand
Lo
L1
L
A Change in the Product PriceShort Run Labor Demand
$
• When the wage
rate is wo, Lo
The
quantity
of
workers
are
wo
demanded.
labor
The short run
• If the
price risesmeans no time
demanded
to
P*, the VMP
increases
to L1 to change
curve shifts up
capital
stock
and to the right
Applying Labor Demand
Lo
L1
L
A change in the Wage Rate-Long
Run Labor Demand
Change in Quantity of Labor
Demanded =
Substitution Effect + Scale Effect
Applying Labor Demand
A change in the Wage Rate-Long
Run Labor Demand
Change in Quantity of Labor
Demanded =
Substitution Effect + Scale Effect
A fall in the wage rate
means increased quantity
demand via the
substitution effect.
Applying Labor Demand
A change in the Wage Rate-Long
Run Labor Demand
Change in Quantity of Labor
Demanded =
Substitution Effect + Scale Effect
While
A fall in the wage
rate the scale effect could be
negative and theoretically
means increased quantity
reverse the substitution effect,
demand via the
it is unlikely.
substitution effect.
Applying Labor Demand
K
A Change in the Product PriceLong Run Labor Demand
L*
L
Let’s see what
happens when in
the long run when
the price of a
product changes.
Initially the firm is
employing L*
workers.
Applying Labor Demand
The Marginal Cost Curve
K
MC
The Level of
Operation is set by
MC = P
L*
L
Applying Labor Demand
Q*
The Marginal Cost Curve
K
MC
The Level of
Operation
is set the
by
When P rises,
MCof=output
P
level
will increase
L*
L
Q* Q**
Applying Labor Demand
Substitution Effect
K
There is no substitution
MC
effect, but the scale effect is
probably positive, so that the
higher price probably leads to
an increased demand.
L*
L
Q* Q**
Applying Labor Demand
End
©2006 Charles
W. Upton
Applying Labor Demand