A Competitive Firm Should Continue to Hire Workers Until the Mrp is Equal to
UNIT 4
Chapter 12
12a
12.1-1 Deriving the Factor Demand Curve
- Outline:
- A firm's demand for a resource like labor is a derived demand. It is derived from the demand for the product that the resource produces
- The profit maximizing rule says that a firm hires labor up to the point at which MRP = MRC (or MRP = W in competitive labor markets)
- to maximize profits, a firm will keep hiring workers until the last worker adds just enough revenue to the firm to cover the cost of that worker
- the demand for labor (by businesses) is a derived demand, that means it resutls from the demand for the products that the labor produces
- MRP = change in TR / change in quantity of labor
- MRP = the extra revenue that the firm gets when it hires one more worker
- MRP = the MB to the firm of hiring another worker
- MRP = MR x MP
- MR = extra output of produding one more unit of output
- MP = extra output from hirirng one more worker
- for purely competitive product market: MRP = P x MP = VMP = value of the marginal product
- ME:
- this is just benefit-cost analysis
- they hire all workers where the MB > MC, up to where the MB = MC
- But, how do we measure the MB of another worker and the MC of another worker?
- MRP
- marginal revenue product
- the MB that a firm gets when it hires another worker
- Definition: the increase in the firm's total revenue derived from hiring one additional worker (or any other variable input
- Formula: MRP = change in TR / change in quantity of labor
- VMP
- VMP is the Value of the Marginal Output
- VMP is the value (P) of the extra output produce by adding one more worker (MP)
- VMP = the price of the output (P) times the extra output produced by the last unit of labor hired (MP)
- P x MP is called the VMP
- if the firm is perfectly competitive then MRP = VMP
- MRP = MR x MP
- but in pure competition we know that MR = P
- so for firm's selling their product in a perfectly competitve market: MRP = P x MP
- VMP = value of the marginal product = P x MP
- VMP = MRP (for firms in purely competitive product markets only)
- What is the profit maximizing quantity of labor to hire if the firm is purely competitive in the short run?
- ME:
- we need to know the extra benefits of hiring one more worker and the extra costs of hiring one more worker
- then we hire up to the point that MB=MC
- MB of hiring one more worker is the MRP or the amount that TR increases when we add one more worker
- MC of hring one more worker
- is the MRC
- margnal resource cost
- MRC = change in TC / change in quantity of labor
- so we will maximize profits if we keep hiring as long as the worker adds more to our revenue (MRP) than it does to our costs (MRC)
- profit maximizing rule: MRP = MRC
- Given:
- P of TVs = $100
- and the table below
- what is the profit maximizing Q of labor to hire?
- i.e. where does MRP = MRC, or in purely competitive product markets, where does VMP = W or MRP = W
- hire as long as the VMP is > wage you have to pay up to where VMP = W
- hire L* number of workers
- thr VMP curve then is the derived demand curve of labor
- it is also the MRP curve; in purely competitive product markets VMP = MRP
- So: the demand for labor is the MRP curve
- VMP = P of the product x MP
- MRP = change in TR / change in Q labor
- New rule for maximizing profits in purely competitive product markets only: W = VMP or W = MRP
- ME:
- New rule for maximizing profits in purely competitive product markets: W = VMP or W = MRP
- this is really the same as MR = MC
- this is really the same as MR = MC
- Now we can draw a Demand curve for Labor
- Remember: DEMAND is a schedule that shows the quantiy employed at various wages
- we know they will hire the quantity up to where the W = MRP (or until W = VMP in purely competitive product markets)
- so we can pick different wages and find the quantity of labor demanded at each wage
- ME:
- the VMP = W rule is only good if BOTH the product market AND the labor markewt are purely competitive
- a more general rule to maximize profits is: MRP = MRC
- also, our textbook only shows the MRP (or VMP here) to be downward sloping, just to keep it simple
- SO, the MRP curve (or VMP here with purely competitive product ASD resource markets) is the resource demand curve
- What will change (shift) the demand for labor (resource)?
- anything that changes the demand for thr product (P, P, I, N, T)
- anything that changes the productivity of the resource (like technology)
- ME: also, changes in the prices of other resources (but this is complicated -- see textbook)
- ME: see the textbook for a more in depth discussion of the determinants of resource (labor) demand
- What happens if you do not have a purely competitve product market and firms have to lower their prices to sell more?
- then VMP will not be the same as MRP
- to find the profit maximizing quantity to hire: MRP = W (or VMP = W)
- ME:
- but this is only if the RESOURCE market is competitive
- a more general rule is: to maximize profits hire labor up to the point where MRP = MRC
- SUMMARY:
- ALWAYS to find the profit maximizing quantity to hire: MRP = MRC
- ONLY WITH competitive product AND resource markets: VMP = W
- ONE MORE THING: since we know compeititve markets are efficient, then the qallocatively efficient quantity to hire is where: VMP = W
12.3-1 The Supply of Labor - The Determination of Wages - Analyzing the Labor Market
- Outline:
- Demand for Labor = MRP
- individual demand
- market demand: horizontal summation
- Supply of Labor
- Equilibrium in the Labor Market
- Demand for Labor = MRP
- Demand for labor is the firm's MRP curve
- For ALL graphs in econmics you should be able to answer three questions:
- what is the relationship being described by the graph?
- what accounts for the slope, or shape, of the curve?
- what would cause the curve to shift?
- for the MRP curve:
- the relationship is the relationship between the wage in th emarket and the quantity of labor than an individual firm finds profitable to hire
- the MRP curve is downward sloping because of the diminishing MP of labor; that is, since each additional workers produce less additinal output than the previous worker so they therefore add less to the firm's revenue
- if the MP of labor declines rapidly the demand for labor (MRP) will be more elastic and a small change in the wage rate will cause a large change in the quantity hired
- ME: the textbook gives the folowinf determinants of elasticity of demand for labor:
- rate of MP decline
- ease of resource substitutability
- elasticity of product demand
- labor-cost to total-cost ratio
- the demand for labor will shift in responsese to changes in two determinants:
- a change in the price of the good or sevice being produced
- a change in labor productivity
- ME: textbook says THREE determinants:
1. changes in product demand which woulds mean changes in the following"
- Pe
- og
- Y
- N
- T
2. productivity changes
3. changes in the prices of other resources- a. substitute resources
b. complementary resources
- Market Demand: horizontal summation
- The Supply curve for labor
- individual households supply labor to businesses
- how much labor will people be willing to supply at different wages
- tradeoff between work or leisure?
- a backward bending supply of labor curve?
- if wages are high people might decide to work less and take more leisure - called the income affect
- but the substitutin effect says that if wages are high people might work more and take less leisure
- but usually econmists assume an upward sloping l;abor supply curve:
- what relationship: the relationship the market wage and rthe amount of time people want to spend at work
- why the upward slope: because the higher the market wage the more people want to work
- whar causes the curve to shift: examples:
- lower taxes so people get to keep more of their income
- if people needed more income like for medical bills
- if preferences toward work and leisure changed
- Equilbrium
- where the labor D and S cross
- Qs = Qd is equilibrium; why
- if wages are too low then the Qd>Qs and there will be a shortage of labor or excess demand for labore will bid wages up through the bidding mechanism
- if wages are too high the the Qd<Qs and there will be excess supply and the bidding mechanism will drive wages lower
- shifts in the demand or supply of labor graphs will change the equilibrium wage rate and the quantity employed
KHAN ACADEMY
- A Firm's Marginal Product Revenue Curve (Khan Academy 13:03)
- How Many People to Hire Given the MPR Curve (Khan Academy 9:02)
- Minimum Wage and Price Floors 9:06 by khanacademy http://www.khanacademy.org/video?v=j0c2vmFGbtk
MINDBITES
- Labor Market Power and Marginal Factor Cost ($1.98 at: http://www.mindbites.com)
- Minimum Wage and Labor Markets ($1.98 at: http://www.mindbites.com)
- Analysis: Labor Unions and Unemployment ($1.98 at: http://www.mindbites.com)
- Economics: The Labor Market 2:37 http://www.mindbites.com/lesson/7600
- GOT IT Economics: Analyzing the Labor Market mindbites
- GOT IT: Economics: The Derived Demand for Labor
YOUTUBE
BILATERAL MONOPOLY
wage determination in imperfect labour markets 4:37 pajholden
http://www.youtube.com/watch?v=9TnuhpzhlsQ
how are wages determined in labour markets, when a monopsonist and then a trade union are present?
mjmfoodle
- (THE LOST EPISODES) Factor Market Overview (YouTube mjmfoodle 1:27)
http://www.youtube.com/watch?v=J0LigIdph8I&list=UU_xHLAJ_zqPHkmC2aY2MdcA - (The Lost Episodes) Perfectly Competitive Factor and Output Markets 5:14)
http://www.youtube.com/watch?v=OUyvqq6ZY6s&list=UU_xHLAJ_zqPHkmC2aY2MdcA&index=2 - (THE LOST EPISODES) Monopsony Factor Market, Perfectly Competitive Output Market (YouTube mjmfoodle 3:09)
http://www.youtube.com/watch?v=tPJzDUq_dfQ&list=UU_xHLAJ_zqPHkmC2aY2MdcA&index=1
ACDCLeadership
Micro Unit 5: Resource Market Playlist by ACDCLeadership
1. Micro Unit 5 Intro- Resource Markets 1:23 by ACDCLeadership
http://www.youtube.com/watch?v=Y2Z9r4PKwI8&playnext=1&list=PL9EB9C5438D7264E8&feature=results_main
2. 5.1 Market and Minimum Wage: Econ Concep... by ACDCLeadership
3. 5.2 Perfectly Competitive Labor Market and Firm... 3:27 by ACDCLeadership
4. 5.3 Comparing Product and Resource Market... by ACDCLeadership
5. 5.4 Resource Market, MRP and MRC: Econ Co... by ACDCLeadership
Perfectly Competitive Resource Market Profit Maximization 9:53 APECONREVIEWER
EconProfessorKate
- Monopsony Deadweight Loss 0:49
- Monopsony Graphically 2:00
carrollouldives49.blogspot.com
Source: http://www2.harpercollege.edu/mhealy/eco211f/micvideonotes12a.htm
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