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3.7 Elasticities of demand

3.7 Elasticities of demand. Elasticity is a measure of the sensitivity between two variables. The elasticity of the demand for labor: E D L = ∆%L / ∆%W < 0 Always (-), by convention we can ignore the sign: | E D L | = 0  perfectly inelastic 0 < | E D L | < 1  inelastic

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3.7 Elasticities of demand

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  1. 3.7 Elasticities of demand • Elasticity is a measure of the sensitivity between two variables. • The elasticity of the demand for labor: • EDL = ∆%L / ∆%W < 0 • Always (-), by convention we can ignore the sign: • |EDL| = 0  perfectly inelastic • 0 < |EDL| < 1  inelastic • |EDL| = 1  unit elastic • |EDL| > 1  elastic • |EDL| = ∞  perfectly elastic • EXAMPLE

  2. 3.7 Elasticities of demand • Determinants of EDL? (Marshall-Hicks) • Elasticity of demand for the commodity EDC • Monopoly? • Long run? • Ratio labor costs/ total costs • L-intensive industries (services) • Substitutability of inputs • Elasticity of supply of other inputs • Empirically: EDL is higher in younger than older people, in blue-collar than white-collar workers, in low-skill than high-skill…why?

  3. 4. The supply of labor • 4.1 Work-leisure decision • When a person looks for a job he is in the LF. The PR is an index of the disposition of people to work • How do people make decisions regarding supply L (SL)? • Decision work – leisure  basic model • Individuals: • Education, skills, experience…and time • Time: work (L) & leisure (l)  maximization of utility (U) • Thus, two sets of information that determine the optimal distribution of t by certain i • Subjective or psychological information (IC), or objective or market information (BC)

  4. 4.2. Indifference curves • Definition: combinations of real income-leisure that provide certain level of utility (or satisfaction) to the i • Features: • Negative slope (trade-off): “y” ($) & “l” (hours) only two sources of satisfaction • Convex to origin: slope drops to the SE • Subjective disposition • Varies depending on y0 & l0 • MRS: slope  “flatter” towards SE; the MRS is the quantity of “y” we sacrifice to earn an additional unit of “l” (U)

  5. 4.2. Indifference curves • Indifference map: each IC represents a different level of utility (set of IC)  towards NE U goes up • Maximization • IC’s do not cross • Different preferences L-l: shape of IC’s, varies from i to i • “Workaholic” v. “Leisure lover”  MRSWA << MRSLL • These differences can be accounted for: preferences, occupations, personal circumstances

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