1. Warm-Up P=$10; W=$100 What is the MRP of the 2nd unit?
Units of Labor
Output 1 30 2 55 3 70 4 78 5 85 6 89
P=$10; W=$100
What is the MRP of the 2nd unit?
Will the firm employ the 2nd unit?
How many units will the firm employ?

2. Labor Market
Chapter 20: Factor Markets and the Distribution of Income (pages )

3. Labor Market Options There are two choices for suppliers:
Leisure
Choose until MB = MC

4. What Would You Do? Pay goes from $10 to $20/hour…
Reasons to work less…
Earn more in less time
Even 1 fewer hour = more money
Reasons to work more…
Earn 2X as before
More you work the more you make

5. 2 Forces at Work… Substitution Effect
Opportunity cost of leisure increases
Supply more labor
Wage rate
Individual labor supply curve
$20 10 40 50
Quantity of labor (hours)

6. 2 Forces at Work… Income Effect Higher wage = relatively more wealthy
Consume more leisure
(b) The Income Effect Dominates
Wage rate
$20 10
Individual labor supply curve 30 40
Quantity of labor (hours)

7. 2 Forces at Work…

8. Market Labor Supply Curve
Sum of individual supply curves
Change in wage = movement
Based on MARGINAL FACTOR COST
MFC = Wage X Quantity of labor

9. Marginal Factor Cost Units of Labor Wage Total Labor Cost MFCL $0 1 $8$0 1 $8 2 $9
$18
$10 3
$30
$12 4
$11
$44
$14 5
$60
$16 6
$13
$78

10. Labor Market Equilibrium
Wage rate
Marginal Factor Cost (Supply)
Equilibrium value of the marginal product of labor E W*
Marginal Revenue Product (Demand) L*
Quantity of labor (workers)
Equilibrium employment

11. Profit-Maximizing Rule…
Hire labor until …
Value last worker = cost of last worker
MRPL = MFCL

12. Shifts in Labor Supply Caused by changes in: Preferences Population
Opportunities
Wealth

13. When Markets are Imperfect…
Perfect markets = same wage for all
Imperfect markets = higher wages for more workers
EXAMPLE: Monopsony

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16. Don’t forget: You can copy-paste this slide into other presentations, and move or resize the poll.
In an emergency during your presentation, if the poll isn't showing, navigate to this link in your web browser:
If you like, you can use this slide as a template for your own voting slides. You might use a slide like this if you feel your audience would benefit from the picture showing a text message on a phone. 16