Discussion 12 (Chapter 18)

Principles of Microeconomics. 7th Edition by N. G. Mankiw, Cengage, 2015.

this last chapter, we will learn about demand and supply for resources. Resources or factors of production, as you would remember from previous chapters, were categorized under three main groups; land, labor, and capital excluding for now entrepreneurship.

Companies demand for labor whereas households supply labor. The demand for labor curve is downward sloping depicting the negative relationship between wages and quantity of labor demanded. As wages decrease, the quantity of labor demanded by companies increases. Labor supply curve is upward sloping depicting the positive relationship between wages and quantity of labor supplied. As wages increase, households increase the quantity of labor supplied. The intersection between the demand for labor curve and supply of labor curve determines the equilibrium wage rate and quantity of labor in an economy.

Having gone over these, answer the following;

What factors shift the demand for labor curve and in which direction? Explain.

What causes a movement along the demand for labor curve? Use examples

What factors cause a shift in the supply of labor curve and in which direction? Explain

What causes a movement along the labor supply curve? Use examples.

Marginal revenue product is (MRP) the change in total revenue resulting from a unit change in quantity labor.

MRP = change in TR / change in quantity of labor hired

Marginal resource cost (MRC) is the change in total cost resulting from a unit change in quantity of labor.

MRC = change in TC / change in quantity of labor.

Just like the profit maximization rule MR=MC, companies find the profit maximizing level of labor by equating MRC to MRP.

Here is an example, say a company hires one worker and sees that the worker adds more to total revenue than total cost. The company seeing this as beneficial hires one more worker, now say that still MRP>MRC, but due to diminishing marginal productivity, the contribution to revenue although higher is now less than the previous worker. The company keeps on hiring more workers until MRP=MRC, then stops at the optimal input level of labor, if it were to hire more than MRC would be greater than MRP, meaning the last worker hired adds more to costs than revenue, signaling the company to hire less.

Here is your next question:

How does a restaurant owner decide to hire the optimal number of waitors or waitresses to work? Use the explanation above in your examples.

In certain market structures determination of the price of labor differs. For example, under monopsony, the monopsony offers the lowest acceptable wage rate, due to the market power it has. Monopsony in this case is the sole hirer of labor, say in an isolated town where, everyone has to work for the company, the monopsonist. Those of you who have read the Grapes of Wrath by Steinbeck might remember this dire situation the workers faced during the Great Depression. The monopsony will say to a worker, are you willing to work for this very low wage? If not, then will hire the next worker who is willing, here the workers have no bargaining power except to work and accept the wage the monopsony offers. To increase the bargaining power workers may form a union. The union then bargains for higher wages for ,workers.

Here is your next set of questions:

In perfectly competitive input markets ,why does the wage rate equal to the marginal revenue product?


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