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Chapter 3

Chapter 3. Labor Demand. Solution Assignment 3. Hick and Slutsky Measurement at same utility (How you measure utility? or What is Thai’s utility function?) or same budget (you can measure it easily) Old and new version

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Chapter 3

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  1. Chapter 3 Labor Demand

  2. Solution Assignment 3 • Hick and Slutsky • Measurement at same utility (How you measure utility? or What is Thai’s utility function?) or same budget (you can measure it easily) • Old and new version • The new version measures at current situation but you can not go back to measure at the past.

  3. We will talk about • Profit maximization • Two steps decision • Short Run and Long run • In the short-run • With CE, price is exogenous variable • Cannot change plant/equipment scale • Fixed capital • Consider MP

  4. Why firm hire labor? • Demand (for good and product) from consumer • Firm acts as middleman  derived demand • Labor is different from other resource • Work situation (environment) • Social status and Opportunity • Need Respectful, Honor, Dignity

  5. Production Function • production function which is • Example Cobb-Douglas • Marginal Product • Law of diminishing returns, marginal product

  6. Optimal Point • Value of Marginal Product • Value of Average Product • Optimal at condition • At competitive market, it is equivalent to

  7. Criticism on short run theory • Homogenous assumption about workers • Realistic • How to calculate marginal product? • How to identify production function?

  8. Output TP AP MP Number of Workers

  9. Output P2 VAP P1 VMP L is not optimal L is optimal Number of Workers

  10. Wage Industry’s Demand P1 P2 Sum of Demand Number of Workers

  11. Long Run Production • In long run, all input variable can be changed • Isoquant and Isoprofit Concept • Shape of Isoquant depends on ability to substitution between two inputs

  12. Example

  13. Capital Cost Minimization Given q* find the lowest C “Least cost combination” C1 C2 C* K* q* E* Number of Workers

  14. Capital Output Maximization Given C* find the highest q If q3 = q* then C3 = C* Or If C3 = C* then q3 = q* C* K* q3 q1 q2 E* Number of Workers

  15. Capital C1 C2 Expansion Path C3 K* q1 q2 q3 E* Number of Workers

  16. Formal Derivation

  17. note

  18. Decreasing in Wage Rate Capital F E q2 q1 w1 w2 Number of Workers

  19. Capital Scale Effect and Substitution Effect W1* This is WRONG!! G F E q2 w1 w2 q1 Number of Workers x1 x2 x3

  20. Capital Scale Effect and Substitution Effect W1* C0/r G C1/r F E q2 w1 w2 q1 Number of Workers x1 x2 x3

  21. About labor demand • Always be downward sloping • Decreasing in wage rate • Scale effect  Increase Production  increase employment • Substitution Effect  labor intensive  increase employment • Factors will be reallocated • More elastic of long run labor demand than short run labor demand

  22. Determination factors of elasticity of demand • Elasticity of substitution • Elasticity of demand for product • increasing price  lower demand  decreasing labor (if labor intensive production) • Elasticity of supply for other inputs • Depend on substitutable between inputs

  23. Marshall’s Rule of Derived Demand • labor demand is more elastic the greater the elasticity of substitution • labor demand is more elastic the greater the elasticity of demand for the output • labor demand is more elastic the greater labor’s share in total cost • the demand for labor is more elastic the greater supply elasticity of other factors of production

  24. Minimum Wage • Form of Policy • A national, government – legislated minimum wage • A national minimum wage (outcome of collective bargaining agreement) • An industry level minimum wage (industry collective bargaining) • Discussion • Should the minimum wage be reduced or increased? • Is the minimum wage effective in reducing earning inequality and poverty? • Why does a minimum wage exist?

  25. Other Issues • Elasticity of labor demand • Elasticity of Substitution • Instrumental variable technique

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