1. 1) “Price and wage takers” Price taking means, literally, that prices come as given for producers  perfect competition In words, with their actions, they cannot affect prices Producers, individually, represent a tiny fraction of the market Is it really so? Why do we do this? Assumption In the labor market we should replace producers by employers and prices by wages Again, a simple assumption we can live with

2. 2) Decision rule: output / labor Maximizing firm  expand output…insofar as MR > MC  Y C up When will output be diminished? MR < MC  Y C down Equilibrium  MR = MC  Y C constant For ΔY C  Δ inputs (L, K)  In terms of inputs: MRPL > MCL  L up MRPL < MCL  L down MRPL = MCL  L constant

3. 3) Output and labor decision in the SR Economics is about understanding reality with a few assumptions Assumptions / models simplify reality for us as to make it more understandable Perfect competition is one assumption The capital input being fixed in the SR in another Therefore, deciding how much to produce equates how much labor to use (in the SR)

4. 4) Diminishing returns Use of land Making line to use the only printer at the office Additional workers in a small room Additional singers in a chorus Why such firms as Wal-mart or Microsoft seem to become more profitable with size? (increasing returns?)

5. 5) Zone 2… “Zone of production” because: –At least we want to move to max. efficiency of L –At the most we might want to move to max. efficiency of K Why not zone 3? Why not zone 1? –Exception: monopoly –Why?