Bài giảng Labour Market Economics - Chapter 5 Demand for Labour in Competitive Labour Markets

Chapter Five Demand for Labour in Competitive Labour Markets Created by: Erica Morrill, M.Ed Fanshawe College1© 2002 McGraw-Hill Ryerson Ltd.Chapter FocusLabour demand curveShort and long runElasticity Competitiveness of Canadian labourGlobalization2© 2002 McGraw-Hill Ryerson Ltd.Demand for LabourFactors of productioninputs into the production of final goodsLinked to the firms demand for goods/servicesDerived demand3© 2002 McGraw-Hill Ryerson Ltd.Employment DecisionsShort-run – one or more factors of production cannot be variedLong-run – firm can adjust all of its inputsState of technical knowledge is assumed to be fixed4© 2002 McGraw-Hill Ryerson Ltd.Demand for LabourThe quantity of labour services the firm would employ at each wageDepends on the firms objectives and constraintsObjective is to maximize profits5© 2002 McGraw-Hill Ryerson Ltd.Firm’s ConstraintsDemand for product (output)Supply of labour (and other factors of production)Production function ( the maximum output given the various combinations of inputs)Fixed quantity of one or more factors of production (short run only)6© 2002 McGraw-Hill Ryerson Ltd.Theory of Labour DemandExamines the quantity of labour the firm desires given the market-determined wage rate given the labour supply function the firm facesAssume: The firm is a perfect competitor in the labour market.7© 2002 McGraw-Hill Ryerson Ltd.Market BehaviourA firm’s behaviour in the product market impacts demand for labourwage rateemployment decisionsThe structure of the labour market affectssupply curve - amount of labour available to the firm at various wage rates8© 2002 McGraw-Hill Ryerson Ltd.Categorizing the Structure of Product MarketsIndustry Structuresperfect competitionmonopolisticoligopolymonopolydecreasing degree ofcompetition9© 2002 McGraw-Hill Ryerson Ltd.Categorizing the Structure of Labour MarketsIndustry Structuresperfect competitionmonopsonistic competitionoligopsonymonopsonydecreasing degree ofcompetition10© 2002 McGraw-Hill Ryerson Ltd.Characteristics of Industry StructuresCategories are independent of each other 16 possible combinations that affect wage and employment outcomes11© 2002 McGraw-Hill Ryerson Ltd.Demand for Labour in the Short RunPerfect Competition CaseChapter 5-12© 2002 McGraw-Hill Ryerson Ltd.Production FunctionFirms use factors of production (labour- N, capital -K) to produce Q (quantity of a single output)Q=F(K,N)In the short-run K is fixed so the production function is simply a function of N13© 2002 McGraw-Hill Ryerson Ltd.Profit-Maximization SituationCosts fall into two categories:fixedvariable Decision Rule #1Operate as long as variable costs are coveredTotal revenue exceeds total variable costs14© 2002 McGraw-Hill Ryerson Ltd.Profit-MaximizationDecision Rule #2Increase output until the additional cost associated with the last unit produced equals the additional revenue associated with that unitMarginal Costs equal Marginal RevenueMC=MR15© 2002 McGraw-Hill Ryerson Ltd.Profit-Maximizing in Terms of Labour DemandTerminology is modified:Total Revenue Product (TRP) - the total revenue associated with the amount of an input employedMarginal Revenue Product (MRP) - the change in total revenue associated with a change in the amount of input employed16© 2002 McGraw-Hill Ryerson Ltd.Profit-Maximizing Decisions in terms of LabourFirm should:produce as long as the total revenue product generated by the variable input exceeds the total costs associated with employing that inputexpand employment of labour to the point at which its marginal revenue product equals marginal cost17© 2002 McGraw-Hill Ryerson Ltd.A Firm’s Short-Run Demand for LabourIn competitive markets:price takercan hire labour without affecting market wagemarginal (and average) cost is market wagehire labour until the MRP equals the Wshort-run labour demand curve is it’s marginal revenue product curve (for labour)18© 2002 McGraw-Hill Ryerson Ltd.Figure 5.1 Short-Run Demand for LabourLabour ServicesN*0Wage RateARPNMRPNN*1 W1Wages higher than W1 the firm would shut downW019© 2002 McGraw-Hill Ryerson Ltd.Short-Run Demand for LabourFirm will shut down if average cost of labour (wage rate) exceeds the average revenue product of labour Short-run labour demand curve MRPN curve below the point at which the average and marginal product curves intersect20© 2002 McGraw-Hill Ryerson Ltd.Short-Run Labour Demand CurveDownward sloping because of diminishing marginal returns to labour in wage rate entice  in demand for labour in wage rate will cause  in demand for labour 21© 2002 McGraw-Hill Ryerson Ltd.Industry StructurePerfectly Competitive Companyprice takercan sell output without affecting market priceMRQ=product priceemploys labour services until the value of MP of labour just equals the wageMonopolyfirm is so large it influences pricewhen the monopolist hires more labour to produce more output, both the marginal physical product of labour and the marginal revenue falls22© 2002 McGraw-Hill Ryerson Ltd.Perfectly Competitive FirmPerfectly Competitive Companyprice takersells output without affecting market priceMRQ=product priceEmploys labour services until the value of MP of labour just equals the wage23© 2002 McGraw-Hill Ryerson Ltd.Labour Demand in Long-RunChapter 5-24© 2002 McGraw-Hill Ryerson Ltd.Isoquants“Equal quantity”Combinations of labour and capital used to produce a given amount of a product (output)Slope exhibits a diminishing marginal rate of technical substitution MRTS25© 2002 McGraw-Hill Ryerson Ltd.Figure 5.2 IsoquantsKN0Q0Q126© 2002 McGraw-Hill Ryerson Ltd.Isocost LineAll combinations of capital and labour that can be bought for a given total costCM=rK+wNTotal Cost =(price of capital x amount)+(wage rate x employees)27© 2002 McGraw-Hill Ryerson Ltd.Figure 5.2 b IsocostNKKH=CH r0KM=CM r0Slope=-w0/r00NH=CH W0NM=CM W028© 2002 McGraw-Hill Ryerson Ltd.Figure 5.2 c Cost-Minimizing NK0K0N1N0NMKMK1Q0E029© 2002 McGraw-Hill Ryerson Ltd. A Firm’s Labour Demand Obtained by varying the wage rate and tracing out the new equilibrium, profit maximizing amounts of labour employed30© 2002 McGraw-Hill Ryerson Ltd.Figure 5.3 a Isocost Rotation from a Wage IncreaseNKKP=C1 r0KM=C0 r00NM=C0 w0NP=C1 w1Slope=-w0/r0Slope=-w1/r0E0Q0K0N031© 2002 McGraw-Hill Ryerson Ltd.Figure 5.3 b Profit Maximizing Output and Derived Labour Demand NK0N0NMKMQ0E0NNKNN1E1Q132© 2002 McGraw-Hill Ryerson Ltd.Figure 5.3 c Derived Labour Demand ScheduleKN0Dw1w0N1N033© 2002 McGraw-Hill Ryerson Ltd.Perfect Competition wage rotates isocost line downwards with a greater slopeThe firm will maximize profit by moving to a lower level of output wage also shifts up the firms’s marginal and average cost curvesIn a perfect competitive industry each firm reduces output raising the price of the product34© 2002 McGraw-Hill Ryerson Ltd.Figure 5.4 a Perfect CompetitionPriceOutputP1P0MC1MC1Q1Q0FIRM35© 2002 McGraw-Hill Ryerson Ltd.Figure 5.4 a IndustryPriceOutputP1P0S1S0q1q0D36© 2002 McGraw-Hill Ryerson Ltd.Figure 5.4 a MonopolyPriceOutputP1P0MC1MC0q1q0DMR37© 2002 McGraw-Hill Ryerson Ltd.Figure 5.5 Substitution and Scale Effects of a Wage ChangeNK0NSN0NMKMKNQ0E0N1E1Q1ES38© 2002 McGraw-Hill Ryerson Ltd.In TheoryDemand schedule is downward sloping firm would substitute cheaper inputs for the more expensive labour SUBSITUTION EFFECT Firm would reduce its scale of operations because of the cost increase associated with the increase in wage SCALE EFFECT39© 2002 McGraw-Hill Ryerson Ltd.Relationship Between the Short and Long Run Short-Runamount of capital is fixedno substitution effectLong-Runfirm has flexibility by varying its capital stockresponse to a wage change will be larger in the long run40© 2002 McGraw-Hill Ryerson Ltd.Elasticity of Demand for LabourDemand for labour decreases as wages increase (negative function) Wage increases have an adverse effect on employmentThe magnitude of the effect can be seen by the elasticity of the derived demand for labour41© 2002 McGraw-Hill Ryerson Ltd.Elasticity of DemandMeasures the responsiveness of the quantity of labour demanded to the wage rateEquals the % change in the quantity of labour demanded divided by the % change in the wage rate42© 2002 McGraw-Hill Ryerson Ltd.Figure 5.7 a InelasticWN0D43© 2002 McGraw-Hill Ryerson Ltd.Figure 5.7 b ElasticWN0D44© 2002 McGraw-Hill Ryerson Ltd.Elasticity of Demand for LabourBasic determinants of the elasticity of demand for labour:availability of substitute inputssupply of substitute inputsdemand for outputratio of labour cost to total cost45© 2002 McGraw-Hill Ryerson Ltd.Elasticity of DemandIf inputs can not be easily substituted  elasticity of labour demandIf demand for output is not effected by a price increase (due to cost of wage increase) demand for labour will be inelasticDemand for labour will be inelastic if labour cost is small portion of total cost 46© 2002 McGraw-Hill Ryerson Ltd.End of Chapter Five47© 2002 McGraw-Hill Ryerson Ltd.