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

Published byLawrence Robinson Modified over 8 years ago

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Presentation on theme: "LABOR DEMAND PROBLEM – How does an employer decide how many people to hire?"— Presentation transcript:

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

2  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 Watch Repairs LTPMPLMRPTRTC π MRMC 00. 144 2106 3155 4183 5202 619

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. Watch Repairs LTPMPLMRPTRTC π MRMC 00.. 144100 2106150 3155125 418375 520250 619-25 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. Watch Repairs LTPMPLMRPTRTC π MRMC 00.. 0 144100 2106150 250 3155125 375 418375 450 520250 500 619-25 475 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. Watch Repairs LTPMPLMRPTRTC π MRMC 00.. 0 100 144 160 2106150 250220 3155125 375280 418375 450340 520250 500400 619-25 475460 TC = TFC + TVC Where TVC = L * w TFC 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. Watch Repairs LTPMPLMRPTRTC π MRMC 0 100 -100 100160 -60 250220 30 375280 95 450340 110 500400 100 475460 15 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. Watch Repairs LTPMPLMRPTRTC π MRMC -100-- -602515.00 302510.00 952512.00 1102520.00 1002530.00 1525-60.00

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. Watch Repairs LTPMPLMRPTRTC π MRMC 00--0100-100-- 144100 160-602515.00 2106150250220302510.00 3155125375280952512.00 4183754503401102520.00 5202505004001002530.00 619-254754601525-60.00 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. Watch Repairs LTPMPLMRPTRTC π MRMC 00--0100-100-- 144100 140-402510.00 210615025018070256.67 3155125375220155258.00 4183754502601902513.33 5202505003002002520.00 619-2547534013525-40.00 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. Watch Repairs LTPMPLMRPTRTC π MRMC 00--0100-100-- 144100 180-802520.00 2106150250260-102513.33 3155125375340352516.00 418375450420302526.67 520250500 02540.00 619-25475580-10525-80.00 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. Watch Repairs LTPMPLMRPTRTC π MRMC 00--0100-100-- 144100 160-602515.00 2106150250220302510.00 3155125375280952512.00 4183754503401102520.00 5202505004001002530.00 619-254754601525-60.00 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. Watch Repairs LTPMPLMRPTRTC π MRMC 00--0100-100-- 144132 160-283315.00 21061983302201103310.00 31551654952802153312.00 4183995943402543320.00 5202666604002603330.00 619-3362746016733-60.00 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. Watch Repairs LTPMPLMRPTRTC π MRMC 00--0100-100-- 14476 160-841915.00 2106114190220-301910.00 31559528528051912.00 41835734234021920.00 520238380400-201930.00 619-19361460-9919-60.00 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. Watch Repairs LTPMPLMRPTRTC π MRMC 00--0100-100-- 144100 160-602515.00 2106150250220302510.00 3155125375280952512.00 4183754503401102520.00 5202505004001002530.00 619-254754601525-60.00 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. Watch Repairs LTPMPLMRPTRTC π MRMC 00--080-80-- 144100 140-402515.00 2106150250200502510.00 31551253752601152512.00 4183754503201302520.00 5202505003801202530.00 619-254754403525-60.00 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. Watch Repairs LTPMPLMRPTRTC π MRMC 00--0120-120-- 144100 180-802515.00 2106150250240102510.00 3155125375300752512.00 418375450360902520.00 520250500420802530.00 619-25475480-525-60.00 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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