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C hapter 15

C hapter 15. Wage Rates in Competitive Labor Markets. Economic Principles. Marginal physical product of labor Marginal revenue product The law of diminishing returns Marginal labor cost The profit-maximizing level of employment. Economic Principles. Firm and industry demand for labor

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C hapter 15

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  1. Chapter 15 Wage Rates in Competitive Labor Markets

  2. Economic Principles • Marginal physical product of labor • Marginal revenue product • The law of diminishing returns • Marginal labor cost • The profit-maximizing level of employment Gottheil - Principles of Economics, 4e

  3. Economic Principles • Firm and industry demand for labor • The supply of labor • The backward-bending supply curve of labor • Wage differentials • Minimum wage laws Gottheil - Principles of Economics, 4e

  4. You Load Sixteen Tons and What Do You Get? Marginal physical product (MPP) • The change in output that results from adding one more unit of a resource, such as labor, to production. MPP is expressed in physical units, such as tons of coal, bushels of wheat, or number of automobiles. Gottheil - Principles of Economics, 4e

  5. You Load Sixteen Tons and What Do You Get? Marginal physical product (MPP) • MPP = change in output (Q) divided by change in the number of people employed (L). Gottheil - Principles of Economics, 4e

  6. You Load Sixteen Tons and What Do You Get? Marginal physical product (MPP) • Any change in MPP is attributed to the hiring of one additional employee. Gottheil - Principles of Economics, 4e

  7. EXHIBIT 1A OUTPUT AND MARGINAL PHYSICAL PRODUCT CURVES Gottheil - Principles of Economics, 4e

  8. EXHIBIT 1B OUTPUT AND MARGINAL PHYSICAL PRODUCT CURVES Gottheil - Principles of Economics, 4e

  9. Exhibit 1: Output and Marginal Physical Product Curves 1. How can the shape of the total output curve in panel a of Exhibit 1 be described? • The total output curve is upward sloping, increasing by large amounts until three miners are employed, then increasing by smaller and smaller amounts when more than three miners are employed. Gottheil - Principles of Economics, 4e

  10. Exhibit 1: Output and Marginal Physical Product Curves 2. Why does the MPP curve in panel b climb to a peak and then fall? • The MPP curve maps the increases noted in the total output curve. The MPP increases for the first three miners, then falls as more miners are added to production. Gottheil - Principles of Economics, 4e

  11. You Load Sixteen Tons and What Do You Get? Law of diminishing returns • As more and more units of one factor of production are added to the production process while other factors remain unchanged, output will increase, but by smaller and smaller increments. Gottheil - Principles of Economics, 4e

  12. You Load Sixteen Tons and What Do You Get? Law of diminishing returns • Adding more labor to a given stock of physical capital must eventually create a less-than-efficient match of labor to capital. Gottheil - Principles of Economics, 4e

  13. You Load Sixteen Tons and What Do You Get? Law of diminishing returns • The law is demonstrated in the eventual flattening of the total output curve and the negative slope of the MPP curve. Gottheil - Principles of Economics, 4e

  14. You Load Sixteen Tons and What Do You Get? Marginal revenue product (MRP) • The change in total revenue that results from adding one more unit of a resource, such as labor, to production. MRP, which is expressed in dollars, is equal to MPP multiplied by the price of the good. Gottheil - Principles of Economics, 4e

  15. You Load Sixteen Tons and What Do You Get? Marginal revenue product • MRP = MPP × price • or • MRP = change in total revenue (TR) divided by change in labor (L). Gottheil - Principles of Economics, 4e

  16. Deriving the Firm’s Demand for Labor The quantity of labor demanded depends on price. If the price of labor falls, the quantity demanded of labor increases. Gottheil - Principles of Economics, 4e

  17. Deriving the Firm’s Demand for Labor Wage rate • The price of labor. Typically, the wage rate is calculated in dollars per hour. Gottheil - Principles of Economics, 4e

  18. Deriving the Firm’s Demand for Labor Total labor cost (TLC) • Quantity of labor employed (L) multiplied by the wage rate (W). • TLC = L × W Gottheil - Principles of Economics, 4e

  19. Deriving the Firm’s Demand for Labor Marginal labor cost (MLC) • The change in a firm’s total cost that results from adding one more worker to production. Gottheil - Principles of Economics, 4e

  20. Deriving the Firm’s Demand for Labor Marginal labor cost (MLC) • MLC = change in TLC divided by change in L. Gottheil - Principles of Economics, 4e

  21. EXHIBIT 2A DERIVING THE MARGINAL LABOR COST CURVE Gottheil - Principles of Economics, 4e

  22. EXHIBIT 2B DERIVING THE MARGINAL LABOR COST CURVE Gottheil - Principles of Economics, 4e

  23. Exhibit 2: Deriving the Marginal Labor Cost Curve What causes the MLC curve to be horizontal in panel b of Exhibit 2? • The labor market is perfectly competitive. Individual firms cannot influence the wage rate. The firm can hire as many workers as it wants at the prevailing wage rate. MLCis equal to the wage rate. Gottheil - Principles of Economics, 4e

  24. Deriving the Firm’s Demand for Labor The hiring rule for firms: • Compare marginal revenue product and wage rate and hire laborers until MRP = W. • If MRP > W, hire more laborers. • If MRP < W, don’t hire. Gottheil - Principles of Economics, 4e

  25. EXHIBIT 3 THE DEMAND FOR LABOR Gottheil - Principles of Economics, 4e

  26. Exhibit 3: The Demand for Labor Why is a firm’s demand for labor equal to marginal revenue product (MRP)? • MRP reflects the maximum a firm is willing to pay for an additional unit of labor. Gottheil - Principles of Economics, 4e

  27. Exhibit 3: The Demand for Labor Why is a firm’s demand for labor equal to marginal revenue product (MRP)? • When the price of labor falls, firms can afford to hire more labor, even though MRP declines. Gottheil - Principles of Economics, 4e

  28. Deriving the Firm’s Demand for Labor Changes in the price of a good and improvements in technology shift the demand curve for labor to the right. Gottheil - Principles of Economics, 4e

  29. EXHIBIT 4 SHIFT IN THEA DEMAND CURVE FOR LABOR CAUSED BY AN INCREASE IN THE PRICE OF THE GOOD Gottheil - Principles of Economics, 4e

  30. Exhibit 4: Shift in the Demand Curve for Labor Caused by an Increase in the Price of the Good How does an increase in the price of coal affect the number of miners hired at a wage rate of $24? • When the price of coal is $2, seven miners are hired at a wage rate of $24. Gottheil - Principles of Economics, 4e

  31. Exhibit 4: Shift in the Demand Curve for Labor Caused by an Increase in the Price of the Good How does an increase in the price of coal affect the number of miners hired at a wage rate of $24? • When the price of coal increases to $3, the demand curve for miners shifts to the right. Gottheil - Principles of Economics, 4e

  32. Exhibit 4: Shift in the Demand Curve for Labor Caused by an Increase in the Price of the Good How does an increase in the price of coal affect the number of miners hired at a wage rate of $24? • At the new coal price, nine miners are demanded at the wage rate of $24. Gottheil - Principles of Economics, 4e

  33. EXHIBIT 5 THE DERIVATION OF MRP USING OLD AND NEW TECHNOLOGY (PRICE OF COAL = $2) Gottheil - Principles of Economics, 4e

  34. Exhibit 5: The Derivation of MRP Using Old and New Technology (Price of Coal = $2) How does a change from old technology to new technology affect the MPP and MRP in Exhibit 5? • With new technology the same miner is able to produce twice as much coal. Gottheil - Principles of Economics, 4e

  35. Exhibit 5: The Derivation of MRP Using Old and New Technology (Price of Coal = $2) How does a change from old technology to new technology affect the MPP and MRP in Exhibit 5? • The new technology doubles both MPP and MRP. Gottheil - Principles of Economics, 4e

  36. Industry Demand for Labor If all of the firms in an industry have essentially the same quality resources, use the same technology, and compete for the same laborers in the same labor market, then the industry’s demand curve for labor is the same as the individual firm’s demand curve for labor, magnified by the number of firms in the industry. Gottheil - Principles of Economics, 4e

  37. EXHIBIT 6 INDUSTRY DEMAND FOR LABOR Gottheil - Principles of Economics, 4e

  38. Exhibit 6: Industry Demand for Labor What is the firm’s demand for labor at a wage rate of $20 compared to the industry’s demand for labor at the same wage rate? • The firm’s demand for labor is 8 at a wage rate of $20. Gottheil - Principles of Economics, 4e

  39. Exhibit 6: Industry Demand for Labor What is the firm’s demand for labor at a wage rate of $20 compared to the industry’s demand for labor at the same wage rate? • With 1,000 firms in the industry, the industry’s demand for labor at $20 = (8 × 1,000) = 8,000 laborers. Gottheil - Principles of Economics, 4e

  40. The Supply of Labor The opportunity cost of working —the value a laborer places on the next best alternative to working—is different for different people. Gottheil - Principles of Economics, 4e

  41. The Supply of Labor Opportunity cost determines how many people are willing to work at differing wage rates. Gottheil - Principles of Economics, 4e

  42. EXHIBIT 7 THE SUPPLY CURVE OF LABOR Gottheil - Principles of Economics, 4e

  43. Exhibit 7: The Supply Curve of Labor Why does the labor supply curve slope up in Exhibit 7? • The curve is upward sloping because the higher the wage rate, the more willing are workers to supply greater quantities of labor. Their opportunity costs are met at higher wage rates. Gottheil - Principles of Economics, 4e

  44. The Supply of Labor Three factors affect workers’ willingness to supply their labor at different wage rates: changes in alternative employment opportunities, changes in population size, and changes in wealth. Gottheil - Principles of Economics, 4e

  45. The Supply of Labor: Changes in Alternative Employment Opportunities • When new industries willing to pay higher wage rates enter a market, fewer laborers are willing to work for the older industry at the lower wage rate. • The supply curve for labor in the older industry shifts to the left. Gottheil - Principles of Economics, 4e

  46. The Supply of Labor: Changes in Population Size • When the population of a region declines, the number of workers willing to work at any wage rate declines. • The supply curve for labor shifts to the left. Gottheil - Principles of Economics, 4e

  47. The Supply of Labor: Changes in Wealth • When people have more wealth, they choose more leisure time and less work. • The supply curve for labor shifts to the left. Gottheil - Principles of Economics, 4e

  48. EXHIBIT 8 CHANGES IN THE SUPPLY CURVE OF LABOR Gottheil - Principles of Economics, 4e

  49. Exhibit 8: Changes in the Supply Curve of Labor What happens to the quantity of labor supplied at a wage rate of $20 when the supply curve shifts from S to S1? • The quantity of labor supplied drops from 8,000 to 6,000. Gottheil - Principles of Economics, 4e

  50. The Supply of Labor An increase in the wage rate typically induces workers to increase the quantity of labor supplied, but only up to a certain point. Gottheil - Principles of Economics, 4e

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