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### Understanding Labor Demand: How Employers Decide on Hiring Numbers ###

This article explores the labor demand problem, detailing how employers determine the optimal number of employees to hire. It examines fundamental market assumptions where firms aim to maximize profits using labor and capital while considering competitive market conditions. Key concepts like marginal revenue, marginal cost, and the relationship between market price, marginal product of labor, and wages are discussed. Various scenarios are analyzed, including the impact of wage fluctuations and fixed costs on hiring decisions, providing insights into effective labor market strategies. ###

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### Understanding Labor Demand: How Employers Decide on Hiring Numbers ###

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  1. LABOR DEMAND PROBLEM – How does an employer decide how many people to hire?

  2. How does an employer decide how many people to hire? • Basic Market Assumptions: • Firms want to maximize profits • Firms use (only) Labor and capital. • The only cost of hiring labor is the hourly wage • Labor and product markets are competitive • The firm is a price taker in both the Labor and Output Markets • Additional Assumption:Capital is Fixed • We are in the Short-RUN

  3. How does an Employer Decide on the Number of Employees to Hire? • Marginal Analysis - • (Recall from Principles of Micro) MR=MC where MR – Marginal Revenue and MC – Marginal Cost • A Stepwise Manner • Hiring the First worker, second, etc, until MR=MC

  4. How does an Employer Decide on the Number of Employees to Hire? • Another Equivalent Method: • Hire as long as MRP >=Wage • Where MRP is the marginal value of additional workers • MRP = P*MPL where P is the output’s price • So What Determines MPL: • Not Personal Characteristics • MPL depends on Capital (K) and Technology • Diminishing Marginal Returns (Diminishing Marginal Productivity)

  5. How does an Employer Decide on the Number of Employees to Hire?NOTICE:  is defined as profits = TR - TC

  6. How does an Employer Decide on the Number of Employees to Hire?Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. MRP = MPL * P

  7. How does an Employer Decide on the Number of Employees to Hire?Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. TR = TP * P

  8. How does an Employer Decide on the Number of Employees to Hire?Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. TFC TC = TFC + TVC Where TVC = L * w TVC

  9. How does an Employer Decide on the Number of Employees to Hire?Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. π= TR – TC Note that π is maximized when MRP = w or MR = MC

  10. How does an Employer Decide on the Number of Employees to Hire?Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100.

  11. How does an Employer Decide on the Number of Employees to Hire? Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Maximum Profit at Hiring 4 workers

  12. What does an Employer do when the price of Labor Decreases?Now Assume market wage is $40 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Maximum Profit at Hiring 5 workers

  13. What does an Employer do when the price of Labor Increases?Now Assume market wage is $80 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Maximum Profit at Hiring 3 workers

  14. How does an Employer Decide on the Number of Employees to Hire? Conclusion: As Wages Decrease the Number of Workers Hired __________. As Wages Increase the Number of Workers Hired __________. increases decreases

  15. How does an Employer Decide on the Number of Employees to Hire? Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Maximum Profit at Hiring 4 workers

  16. What does an Employer do when the price of the Output Increases?Now Assume market wage is $60 per day and the (average) cost of a watch repair is $33 and total fixed cost is $100. Maximum Profit at Hiring 5 workers

  17. What does an Employer do when the price of the Output Decreases?Now Assume market wage is $60 per day and the (average) cost of a watch repair is $19 and total fixed cost is $100. Maximum Profit at Hiring 3 workers

  18. How does an Employer Decide on the Number of Employees to Hire? Conclusion: As Price of Output Decrease the Number of Workers Hired __Decreases__. As Price of Output Increase the Number of Workers Hired __Increases__.

  19. How does an Employer Decide on the Number of Employees to Hire? Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $100. Maximum Profit at Hiring 4 workers

  20. What does an Employer do when the Fixed Cost Decreases?Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $80. Maximum Profit at Hiring 4 workers

  21. What does an Employer do when the Fixed Cost Increases?Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed cost is $120. Maximum Profit at Hiring 4 workers

  22. How does an Employer Decide on the Number of Employees to Hire? Conclusion: As Fixed Cost Decreases the Number of Workers Hired __Remains Unchanged__. As Fixed Cost Increases the Number of Workers Hired __Remains Unchanged__.

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