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Principles of economics 2nd by mankiw chapter 18

The Economics of
Labor Markets
Chapter 18
Copyright © 2001 by Harcourt, Inc.
All rights reserved.   Requests for permission to make copies of any part of the
work should be mailed to:
Permissions Department, Harcourt College Publishers,
6277 Sea Harbor Drive, Orlando, Florida 32887-6777.


Factors of Production
Factors of production are the
inputs used to produce goods
and services.

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The Market for the Factors of
Production
The demand for a factor of

production is a derived demand.
◆A firm’s demand for a factor of
production is derived from its
decision to supply a good in
another market.

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The Demand for Labor
Labor markets, like other markets
in the economy, are governed by the
forces of supply and demand.

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The Versatility of Supply and
Demand...
(a) The Market for Apples

(b) The Market for Apple Pickers

Price
of
Apples

Wage
of
Supply
Apple
Pickers

P

W

Supply

Deman


d

Deman
d
0

Q

Quantity
of

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0

L

Quantity of
Apple


The Demand For Labor
Most labor services, rather than
being final goods ready to be enjoyed
by consumers, are inputs into the
production of other goods.

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The Production Function and
The Marginal Product of Labor
The production function illustrates the
relationship between the quantity of
inputs used and the quantity of output
of a good.

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How the Competitive Firm Decides
How Much Labor to Hire

Labor
L
0
1
2
3
4
5

Output
Q
0
100
180
240
280
300

Marginal
Product
of Labor
MPL
M PL = ∆ Q /∆ L

Value of the
Marginal
Product
of Labor
VMPL=PxMPL

Wage
W

100
80
60
40
20

$1,000
$800
$600
$400
$200

$500
$500
$500
$500
$500

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Marginal Profit
∆ P r o fit = V M P L − W

$500
$300
$100
-$100
-$300


The Production Function...
350
300

5
4

250

3

Quantity of
Apples

200
2

150
100

1

50
0

0
0

1

2

3

4

Quantity of Apple Pickers
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5

6


The Production Function and The
Marginal Product of Labor
The marginal product of labor is
the increase in the amount of
output from an additional unit of
labor.
MPL = ∆Q/∆L
MPL = (Q2 – Q1)/(L2 –
L1)
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Diminishing Marginal Product
of Labor
As the number of workers increases, the
marginal product of labor declines.
◆ As more and more workers are hired,
each additional worker contributes less to
production than the prior one.
◆ The production function becomes flatter
as the number of workers rises.


This property is called diminishing
marginal product.
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The Production Function...
350
300

5
4

250

3

Quantity of
Apples

200
2

150
100

1

50
0

0
0

1

2

3

4

Quantity of Apple Pickers
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

5

6


The Value of the Marginal
Product of Labor
◆ The

value of the marginal product is
the marginal product of the input
multiplied by the market price of the
output.
VMPL = MPL X P

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The Value of the Marginal
Product of Labor
◆ The

value of the marginal product is
measured in dollars.
◆ It diminishes as the number of
workers rises because the market
price of the good is constant.

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The Value of the Marginal Product
and the Demand for Labor


To maximize profit, the competitive,
profit-maximizing firm hires workers up
to the point where the value of marginal
product of labor equals the wage.

VMPL = Wage

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The Value of the Marginal Product
and the Demand for Labor
The value-of-marginal-product curve
is the labor demand curve for a
competitive, profit-maximizing firm.

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The Value of the Marginal Product
of Labor...
Value of
the
Marginal
Product

Market
wage

Value of marginal product
(demand curve for labor)
0

Profit-maximizing
quantity

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Quantity of
Apple Pickers


Input Demand and Output
Supply
When a competitive firm hires labor up to
the point at which the value of the
marginal product equals the wage, it also
produces up to the point at which the price
equals the marginal cost.

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What Causes the Labor
Demand Curve to Shift?
◆ Output

Price
◆ Technological Change
◆ Supply of Other factors

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The Labor Supply Curve
The labor supply curve reflects how
workers’ decisions about the labor-leisure
tradeoff respond to changes in
opportunity cost.
◆ An upward-sloping labor supply curve
means that an increase in the wages
induces workers to increase the quantity
of labor they supply.


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The Labor Supply Curve
Wage
(price of
labor)

0
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Supply

Quantity of
Labor


What Causes the Labor Supply
Curve to Shift?
◆ Changes

in Tastes
◆ Changes in Alternative
Opportunities
◆ Immigration

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Equilibrium in the Labor
Market
◆ The

wage adjusts to balance the
supply and demand for labor.
◆ The wage equals the value of the
marginal product of labor.

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Equilibrium in the Labor
Market...
Wage
(price of
labor)

Supply

Equilibriu
m wage,
W

0

Deman
d
Equilibrium
employment, L

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Quantity of
Labor


Equilibrium in the Labor
Market
◆ Labor

supply and labor demand
determine the equilibrium wage.
◆ Shifts in the supply or demand
curve for labor cause the
equilibrium wage to change.

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