how many hours of labor would firms hire (the quantity demanded), if the wage were $____ per hour,...

How many hours of labor would firms hire (the quantity demanded), if the wage were $____ per hour, given that everything else relevant to the demand for labor remains the same.

Labor MarketsQuestion: What are the two essential elements of every market? Demand

Wage ($/hour)

Labor (hours)

S

DL*

w*

In equilibrium:Quantity of

labor demanded

Quantity of labor

suppliedequals

Market Demand Curve for Labor:

Question: Where does the market demand curve for labor come from?

Wage

LDA DDB

Wage

L

Wage

L

10

20

30

40

10203040

10

20

30

40

10

20

30

40

Claim: The market demand curve or labor is the horizontal sum of each firm’s individual

demand curve for labor

Firm A Firm B

How many hours of labor would Firm A hire if the wage were $____ per hour, given that …?

How many hours of labor would Firm B hire if the wage were $____ per hour, given that …?

Labor Market

If w =

If w =

If w =

If w =

Supply

Question: Where does and individual firm’s demand curve for labor come from?

How much labor will a firm hire?

Firm’s Goal:

Marginal Revenue Product of Labor (MRPL) = Change in the firm’s total revenue resulting from hiring one more or one less hour of labor.

Marginal Expense of Labor (MEL) = Change in the firm’s total cost resulting from hiring one more or one less hour of labor.

Scenario 1: Suppose that MRPL = $50 MEL = $30

If one more hour of labor were

hired TR would increase by $50

If one more hour of labor were

hired TC would increase by $30

Total Revenue Total Cost

Up by $50

Up by $30

Profit =

Up by $20

Generalizing:

MRPL > MEL

MRPL = $20 MEL = $30

If one less hour of labor were hired TR would decrease by

$20

If one less hour of labor were hired TC would decrease by

$30

Down by $20

Down by $30

Up by $10

Less labor increases profit

More labor increases profit

MRPL < MEL

Profit maximized

MRPL = MEL

Strategy: A closer look at Marginal Expense of Labor (MEL)

Marginal Revenue Product of Labor (MRPL)

Scenario 2: Suppose that

Marginal Expense of Labor (MEL)

Marginal Expense of Labor (MEL) = Change in the firm’s total cost resulting from hiring one moreor one less hour of labor.

MEL = Wage

w

L

10

20

30

40

Firm A

If w = MEL = $10

If w = MEL = $20

If w = MEL = $30

If w = MEL = $40



Marginal Product of Labor (MPL) = Change in the firm’s output resulting from hiring one more or one less hour of labor.

Marginal Revenue (MR) = Change in the firm’s total revenue resulting from a one can change in beer production.

Claim: A firm’s marginal revenue product of labor (MRPL) equals its marginal product of labor (MPL) times marginal revenue (MR).

MRPL = MPL MR

Question: If a firm hires a worker for one additional hour, by how much will it’s costs rise?

Answer: An amount equal to the wage.



Marginal Product of Labor (MPL) = Change in the firm’s output resulting from hiring one more or one less hour of labor.

Marginal Revenue (MR) = Change in the firm’s total revenue resulting from a one can change in beer production.

Claim: A firm’s marginal revenue product of labor (MRPL) equals its marginal product of labor (MPL) times marginal revenue (MR).

MRPL = MPL MR

Suppose that the firm’s marginal physical product of labor is 6 cans for beer and marginal revenue equals $2 per can.

MPL = 6 MR = $2

If one more hour of labor were hired

Beer production increases by 6 cans

Each additional can increases total revenue

by $2 for a total of 6 $2 = $12

MPL = 6

MR = $2

Generalizing: MRPL = MPL MR

Marginal Revenue Product of Labor (MRPL) CurveClaim: The marginal revenue product of labor curve is a downward sloping curve; that is, as the firm hires more labor, the marginal revenue product of labor decreases.

MPL

L

Firm A

QMR

Monopoly:Perfect Competition:

D

q

MR = P

L up

P

MPL

down

Quantity up

MR

Unchanged

MRPL

L

Firm A

MPL

MRPL

MRPL = MPL MR

Down

Unchanged

or down

Down

MR

Down

Question: What about marginal

revenue?

MR = P MR < PQuestion: Why is the marginal product of labor (MPL) curve downward sloping?

Answer: Diminishing marginal product of labor. (Remember Mr. Atkins’ apple orchard.)

How many hours of labor would firm A hire (the quantity demanded), if the wage were $____ per hour, given that everything else relevant to the demand for labor remains the same.

Firm A’s Individual Demand Curve for Labor:

Wage

LMRPL

10

20

30

40

10203040

Claim: Firm A’s individual demand curve for labor is its marginal revenue product of labor curve

Firm A

If w =

If w =

If w =

If w =

MRPL curve is downward sloping

MEL = Wage

MEL = 10

MEL = 20

MEL = 30

MEL = 40

D

MRPL > MEL

Less labor increases profit

More labor increases profit

MRPL < MEL

Profit maximized

MRPL = MEL

Firm A’s Goal: Maximize Profit Pieces of the Puzzle: MRPL and MEL

Wage

L

D

S

L*

w*

Competitive Labor MarketThe equilibrium is determined by the market demand curve and market supply curve for labor.

Market demand curve: The horizontal sum of each individual firm’s demand curve for labor.

Since each individual firm’s demand curve for labor is downward sloping, the market demand curve for labor is downward sloping.

Market supply curve: Upward sloping.

Tying Up a Loose End: Two Profit Maximizing Rules – How Are They Related?Rule #1

How much output should the firm produce?

Rule #2How much labor

should the firm hire?MR MC=

Change in TR resulting from a 1 can change in the quantity of beer produced

Change in TC

resulting from a 1 can change in the quantity of beer produced

MRPL MEL=

Change in TR when 1 more or

1 less hour of labor is hired

Change in TC

when 1 more or 1 less hour of labor is hired

MPL = 6 cans of beer MR = $2 w = $12

MRPL = MPL MR

6= 2 $12=

MEL = w

$12=

Question: What does MC equal?

1 more hour of labor is hired

Firm produces 6 more cans

TCincreases by $12

If the firm produced 1 more can

TC would increase by $2

MC = $2

MPL = 6 MEL = $12

Numerical example

Some calculations

Rule 2 is being satisfied.

Rule 1 is being satisfied.

What about Rule 1?

how many hours of labor would firms hire (the quantity demanded), if the wage were $____ per hour,...

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