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LABOR DEMAND

LABOR DEMAND. PROBLEM – How does an employer decide how many people to hire?. How does an employer decide how many people to hire?. Basic Market Assumptions: Firms want to maximize profits Firms use (only) Labor and capital. The only cost of hiring labor is the hourly wage

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LABOR DEMAND

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  1. LABOR DEMAND PROBLEM – How does an employer decide how many people to hire?

  2. How does an employer decide how many people to hire? • Basic Market Assumptions: • Firms want to maximize profits • Firms use (only) Labor and capital. • The only cost of hiring labor is the hourly wage • Labor and product markets are competitive • The firm is a price taker in both the Labor and Output Markets • Additional Assumption:Capital is Fixed • We are in the Short-RUN

  3. How does an Employer Decide on the Number of Employees to Hire? • Marginal Analysis - • (Recall from Principles of Micro) MR=MC where MR – Marginal Revenue and MC – Marginal Cost • A Stepwise Manner • Hiring the First worker, second, etc, until MR=MC

  4. How does an Employer Decide on the Number of Employees to Hire? • Another Equivalent Method: • Hire as long as MRP >=Wage • Where MRP is the marginal value of additional workers • MRP = P*MPL where P is the output’s price • So What Determines MPL: • Not Personal Characteristics • MPL depends on Capital (K) and Technology • Diminishing Marginal Returns (Diminishing Marginal Productivity)

  5. How does an Employer Decide on the Number of Employees to Hire?NOTICE:  is defined as profits = TR - TC

  6. How does an Employer Decide on the Number of Employees to Hire?Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. MRP = MPL * P

  7. How does an Employer Decide on the Number of Employees to Hire?Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. TR = TP * P

  8. How does an Employer Decide on the Number of Employees to Hire?Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. TFC TC = TFC + TVC Where TVC = L * w TVC

  9. How does an Employer Decide on the Number of Employees to Hire?Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. π= TR – TC Note that π is maximized when MRP = w or MR = MC

  10. How does an Employer Decide on the Number of Employees to Hire?Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100.

  11. How does an Employer Decide on the Number of Employees to Hire? Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Maximum Profit at Hiring 4 workers

  12. What does an Employer do when the price of Labor Decreases?Now Assume market wage is $40 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Maximum Profit at Hiring 5 workers

  13. What does an Employer do when the price of Labor Increases?Now Assume market wage is $80 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Maximum Profit at Hiring 3 workers

  14. How does an Employer Decide on the Number of Employees to Hire? Conclusion: As Wages Decrease the Number of Workers Hired __________. As Wages Increase the Number of Workers Hired __________. increases decreases

  15. How does an Employer Decide on the Number of Employees to Hire? Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Maximum Profit at Hiring 4 workers

  16. What does an Employer do when the price of the Output Increases?Now Assume market wage is $60 per day and the (average) cost of a watch repair is $33 and total fixed cost is $100. Maximum Profit at Hiring 5 workers

  17. What does an Employer do when the price of the Output Decreases?Now Assume market wage is $60 per day and the (average) cost of a watch repair is $19 and total fixed cost is $100. Maximum Profit at Hiring 3 workers

  18. How does an Employer Decide on the Number of Employees to Hire? Conclusion: As Price of Output Decrease the Number of Workers Hired __Decreases__. As Price of Output Increase the Number of Workers Hired __Increases__.

  19. How does an Employer Decide on the Number of Employees to Hire? Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Maximum Profit at Hiring 4 workers

  20. What does an Employer do when the Fixed Cost Decreases?Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $80. Maximum Profit at Hiring 4 workers

  21. What does an Employer do when the Fixed Cost Increases?Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $120. Maximum Profit at Hiring 4 workers

  22. How does an Employer Decide on the Number of Employees to Hire? Conclusion: As Fixed Cost Decreases the Number of Workers Hired __Remains Unchanged__. As Fixed Cost Increases the Number of Workers Hired __Remains Unchanged__.

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