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3.3 Demand in the short run: perfect competition (product market)

3.3 Demand in the short run: perfect competition (product market). Conclusion: the firm will be facing a MPL curve, which is the main element behind its labor demand curve To see the relation between MPL and the labor demand curve we must make use of monetary units ($) Numerical EXAMPLE.

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3.3 Demand in the short run: perfect competition (product market)

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  1. 3.3 Demand in the short run: perfect competition (product market) Conclusion: the firm will be facing a MPL curve, which is the main element behind its labor demand curve To see the relation between MPL and the labor demand curve we must make use of monetary units ($) Numerical EXAMPLE

  2. 3.3 Demand in the short run: perfect competition (product market) • Observations (example): • When MPL is decreasing • (Zone 2, LDR) • P is fixed, it won’t go down while increasing output • Perfect competition: DC is perfectly elastic (horizontal) • Columns (1) & (6): DL in the SR • Rule or equilibrium condition (profit max.) MRPL = MWC • MWC = Δ W paid for an additional unit of L • If MRPL > MWC  L up • If MRPL < MWC  L down

  3. 3.3 Demand in the short run: perfect competition (product market) • Assuming firms are “wage-takers”  no effect on W  MWC = W  MRPL = W • Competitive firm will use L up until MRPL = W • The DL curve indicates the amount demanded at different levels of W • Only under perfect competition MRPL = VMPL • Producers can sell all they want at P • The additional sale increases earnings by P x u. • The additional earnings for producing with 1u. more of L = VMPL

  4. 3.4 Demand in the short run: imperfect competition (product market) • Most of the firms: some market power • Some effect on prices • DC is no longer perfectly elastic • Negative slope • Product differentiation • To sell more (while adding L), P should now drop • The sale of 1 extra u. does not contribute as in PC • MRPL ≠ VMPL • Conclusion: MRPL falls not only by LDR, but also due to the fact that P should drop if we want to sell/produce more • This cut in P is applicable to all previous units

  5. 3.4 Demand in the short run: imperfect competition (product market) • Numerical EXAMPLE • As before: MRPL = W D’L curve • Ceteris paribus, D’L is less elastic than DL • That is, firms with certain monopolistic power are less affected by changes of W • Higher restriction on output  fewer workers • It is more beneficial to produce less • MRPL (in PC) = VMPL > MRPL (under IC)

  6. Demand in the short run • Summing up: • DL is a derived demand of DC • Insofar as L increases (with K), YC increases: • First, at a growing rate (MPL up) • Then at a decreasing rate (MPL down) • But later, it becomes negative (MPL < 0) • MRPL = W  MRPL in zone 2 is the DL • Under IC, YC and L are restricted  MRPL ≠ VMPL

  7. 3.5 Demand in the long-run • L & K are both variable • YLR= f ( L, K ) • DL* indicates the L that firms employ at each W with L & K variables • In introducing t, we can now think of substitution • Scale effect: ΔL as a result of ΔY (due to ΔW, Δcosts) • Substitution effect: ΔL as a result of ΔRP (due to ΔW) • Consequence: DL* is more elastic than DL • Other factors which make it even more elastic: • DC • Interactions K-L • Technology

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