Competitive Factor Markets Demand for a Factor Input when Only one Input Is variable a Choosing the profit-maximizing amount of labor If MrPl> w(the marginal cost of hiring a worker): hire the worker If MRPI w. hire less labor o If MRPL= w profit maximizing amount of labor Chapter 14 Slide 11
Chapter 14 Slide 11 Competitive Factor Markets ◼ Choosing the profit-maximizing amount of labor ⚫ If MRPL > w (the marginal cost of hiring a worker): hire the worker ⚫ If MRPL < w: hire less labor ⚫ If MRPL = w: profit maximizing amount of labor Demand for a Factor Input When Only One Input Is Variable
Hiring by a Firm in the Labor Market (with Capital Fixed) In a competitive labor market, a Price of firm faces a perfectly elastic supply of labor Labor and can hire as many workers as it wants at w The profit maximizing firm will hire l units of labor at the point where the marginal revenue product of labor is equal to the wage rate W L Why not hire fewe or more workers than l* MRPL= DL L Quantity of Labor Chapter 14 Slide 12
Chapter 14 Slide 12 w* SL In a competitive labor market, a firm faces a perfectly elastic supply of labor and can hire as many workers as it wants at w*. Hiring by a Firm in the Labor Market (with Capital Fixed) Quantity of Labor Price of Labor Why not hire fewer or more workers than L*. MRPL = DL L* The profit maximizing firm will hire L* units of labor at the point where the marginal revenue product of labor is equal to the wage rate
Competitive Factor Markets Demand for a Factor Input when Only one Input Is variable a If the market supply of labor increased relative to demand (baby boomers or female entry), a surplus of labor would exist and the wage rate would fall ■ Question How would this impact the quantity demanded for labor? Chapter 14 Slide 13
Chapter 14 Slide 13 Competitive Factor Markets ◼ If the market supply of labor increased relative to demand (baby boomers or female entry), a surplus of labor would exist and the wage rate would fall. ◼ Question ⚫ How would this impact the quantity demanded for labor? Demand for a Factor Input When Only One Input Is Variable
A Shift in the Supply of Labor Price off Labor 1 2 MRPL=DL Quantity of Labor Chapter 14 Slide 14
Chapter 14 Slide 14 A Shift in the Supply of Labor Quantity of Labor Price of Labor w1 S1 MRPL = DL L1 w2 L2 S2
Competitive Factor Markets a Comparing Input and output Markets MRPL=( MPDOMR) and at profit maximizing number of workers MRPL=w (MPDOMR=w MR=W/MPL W/MP=MC of production Chapter 14 Slide 15
Chapter 14 Slide 15 Competitive Factor Markets ◼ Comparing Input and Output Markets MP MC of production MR MP (MP )(MR) number of workers MRP and at profit maximizing MRP (MP )(MR) L L L L L L = = = = = w w w w