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Labor Market

Labor Market. Liza Rozen Yorktown High School Arlington, VA November 13, 2008. Labor Economics. Labor markets function through interactions between workers and employers. Labor economics looks at supply of labor, demand of labor, and resulting wages, employment, and income.

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Labor Market

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  1. Labor Market Liza Rozen Yorktown High School Arlington, VA November 13, 2008

  2. Labor Economics • Labor markets function through interactions between workers and employers. • Labor economics looks at supply of labor, demand of labor, and resulting wages, employment, and income

  3. Resource Pricing • Money income determination: Resource prices are major factors in determining the income of households. Price firm pays for labor resource changes as wage, rent, interest, profit incomes to households that supply labor change • Cost minimization: resource prices are a cost to the firm. Company is trying maximize profit with the most cost efficient resources. Resource prices play a large part in determining quantities of land, labor, capital, and entreprenrual ability that is involved in producing each good

  4. Resource allocation: resource prices allocate resources among industries and firms just as product prices allocate goods and services to consumers. • Policy Issues: many policy issues surround the labor market. For example, should government raise minimum wage, Should government do anything to discourage excess pay to corporate executives?

  5. Resource Demand as a Derived Demand • Demand for any resource is an inverse relationship between price of the resource and the quantity of the resource demanded. • This demand is a derived demand. It is derived from products that the resources help produce. • Demand for a product creates the demand for the labor resource

  6. Marginal Revenue Products • Demand of resource depends on… • The productivity of the resource is helping create a good or service • The market value of price of the good or service it helps produce

  7. Rule for employng resources • MRP=MRC • To maximize profits a firm should hire additional units of a resource as long as each successive unit adds more to the firm’s total revenue then it does to the firm’s total cost • Marginal resource cost= • Change in total resource cost/unit change in resource quantity

  8. MRP as resource demand schedule • In purely competitive labor markets market supply and market demand establish wage. • Each firm hires such a small percentage of the resource it can’t influence the market wage; it is a wage taker, not a wage setter. • This means each additional unit of labor hired the TRC increases by exactly the amount of the constant market wage rate

  9. Determinates of resource demand • Changes in Product Demand: other things equal a increase in the demand for a products will increase the demand for a resource, and for a decrease in demand vice versa • Changes in Productivity: If productivity of a resource increases the demand for the resource. If the productivity of a resource decreases then demand will decrease • There are several way changes in productivity may be altered; by the quantity of other resources-marginal productivity changes, technological advance-improve quality of resource, quality of variable resource-improvements in quality of labor market

  10. Changes in the price of other resources may change demand • Substitute resources-technology is such that labor and capital are substitutable • Substitution effect-decline in price of machinery allows firm to substitute machinery for labor • Output effect-because price of machinery has fallen, costs of producing various outputs must also decline. With lower cost firm finds itself profitable to produce and sell a greater output.

  11. Demand for labor increases when… • Demand for product produced increases • Productivity of labor increases • Price of a substitute decreases, provided output effect exceeds substitution effect • Price of substitute increases, provided substitution effect exceeds output effect • Price of complementary good decreases

  12. Ratio of resource cost to TC • Larger the proportion of total production costs accounted for by a product the greater the elasticity of demand for the resource

  13. Least Cost Rule • Cost of any output is minimized when the ratios of marginal product to price of the last units of resource used are the same for each resource • With just two resources, labor and capital, a competitive firm maximizes its total cost of a specific output when • Marginal product of labor/price of labor = • Marginal product of capital/price of capital

  14. Profit Maximization • In a competitive market a form will achieve a profit maximizing combination of resources when each resource is employed to the point where marginal revenue product equals resource price

  15. Marginal productivity theory of income distribution • Income gets distributed according to one’s contribution to society’s output.

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