Introduction to Labor Markets

1
Introduction to Labor Markets

• Chapter 3 Short-run labor demand

2
Profit maximization

• economic profit TR - TC
• adding a worker increases TR and increases TC.
• a firm will add more labor if TR rises by more
  than TC.
• a firm can increase its profits by using less
  labor if the additional revenue generated by the
  last worker is less than the additional cost of
  adding that worker.

3
MRP and MFC

• marginal revenue product (MRP) of labor the
  additional revenue that results from the use of
  an additional unit of labor
• marginal factor cost (MFC) of labor the
  additional cost associated with the use of an
  additional unit of labor

4
MRP, MFC and profit maximization

• a firm will use more labor if MRP gt MFC
• a firm will use less labor if MRP lt MFC
• a firm maximizes its profit at the level of labor
  use at which MRP MFC

5
MRP

• MRP MR x MP,
• where

Alternatively
6
Slope of MRP curve

• MRP MR x MP
• MR is constant if the output market is perfectly
  competitive and decreasing if the output market
  is imperfectly competitive.

7
Slope of MRP curve

• MRP MR x MP

8
Marginal factor cost

• In a perfectly competitive labor market, MFC w

9
Short-run labor demand in a perfectly competitive
labor market
10
Short-run labor demand in a perfectly competitive
labor market
11
Market labor demand curve

• As noted earlier, the market demand curve for
  labor is simply the horizontal summation of all
  of the individual firms' labor demand curves.

12
Monopsony

• A monopsony occurs when there is a single buyer
  of a good.
• In the case of a labor market, a monopsony occurs
  when only one firm hires workers in a given labor
  market.

13
Supply curve facing a monopsonist

• A monopsony firm faces the entire market labor
  supply curve.
• MFC gt w

14
Wage and employment determination under a
monopsony labor market
15
Minimum wage (or union) in a monopsony
16
Minimum wage (or union) in a monopsony
17
Effects of a payroll tax in a perfectly
competitive labor market