LABOR DEMAND
PROBLEM –
How does an employer decide howmany people to hire?
How does an employer decide howmany people to hire?
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 andOutput Markets
Additional Assumption: Capital is Fixed
We are in the Short-RUN
How does an Employer Decideon the Number of Employees toHire?
Marginal Analysis -
(Recall from Principles of Micro) MR=MCwhere MR – Marginal Revenue and MC –Marginal Cost
A Stepwise Manner
Hiring the First worker, second, etc, untilMR=MC
How does an Employer Decide on the Number ofEmployees to Hire?
Another Equivalent Method:
Hire as long as MRP >=Wage
Where MRP is the marginal value of additionalworkers
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 (DiminishingMarginal Productivity)
How does an Employer Decide on the Number ofEmployees to Hire? NOTICE: is defined as profits = TR - TC
Watch Repairs
L
TP
MPL
MRP
TR
TC
π
MR
MC
0
0
.
1
4
4
2
10
6
3
15
5
4
18
3
5
20
2
6
19
-1
How does an Employer Decide on the Number ofEmployees to Hire? Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixedcost is $100.
Watch Repairs
L
TP
MPL
MRP
TR
TC
π
MR
MC
0
0
.
.
1
4
4
100
2
10
6
150
3
15
5
125
4
18
3
75
5
20
2
50
6
19
-1
-25
MRP = MPL * P
How does an Employer Decide on the Number ofEmployees to Hire? Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixedcost is $100.
Watch Repairs
L
TP
MPL
MRP
TR
TC
π
MR
MC
0
0
.
.
0
1
4
4
100
100
2
10
6
150
250
3
15
5
125
375
4
18
3
75
450
5
20
2
50
500
6
19
-1
-25
475
TR = TP * P
How does an Employer Decide on the Number ofEmployees to Hire? Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixedcost is $100.
Watch Repairs
L
TP
MPL
MRP
TR
TC
π
MR
MC
0
0
.
.
0
100
1
4
4
100
100
160
2
10
6
150
250
220
3
15
5
125
375
280
4
18
3
75
450
340
5
20
2
50
500
400
6
19
-1
-25
475
460
TC = TFC + TVC
Where
TVC = L * w
TFC
TVC
How does an Employer Decide on the Number ofEmployees to Hire? Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixedcost is $100.
Watch Repairs
L
TP
MPL
MRP
TR
TC
π
MR
MC
0
100
-100
100
160
-60
250
220
30
375
280
95
450
340
110
500
400
100
475
460
15
π = TR – TC
Note that π ismaximized whenMRP = w or
MR = MC
How does an Employer Decide on the Number ofEmployees to Hire? Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixedcost is $100.
Watch Repairs
L
TP
MPL
MRP
TR
TC
π
MR
MC
-100
-
-
-60
25
15.00
30
25
10.00
95
25
12.00
110
25
20.00
100
25
30.00
15
25
-60.00
How does an Employer Decide on the Number ofEmployees to Hire? Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed costis $100.
Watch Repairs
L
TP
MPL
MRP
TR
TC
π
MR
MC
0
0
-
-
0
100
-100
-
-
1
4
4
100
100
160
-60
25
15.00
2
10
6
150
250
220
30
25
10.00
3
15
5
125
375
280
95
25
12.00
4
18
3
75
450
340
110
25
20.00
5
20
2
50
500
400
100
25
30.00
6
19
-1
-25
475
460
15
25
-60.00
Maximum
Profit at
Hiring 4
workers
What does an Employer do when the price ofLabor Decreases? Now Assume market wage is $40 per day and the (average) cost of a watch repair is $25 and total fixedcost is $100.
Watch Repairs
L
TP
MPL
MRP
TR
TC
π
MR
MC
0
0
-
-
0
100
-100
-
-
1
4
4
100
100
140
-40
25
10.00
2
10
6
150
250
180
70
25
6.67
3
15
5
125
375
220
155
25
8.00
4
18
3
75
450
260
190
25
13.33
5
20
2
50
500
300
200
25
20.00
6
19
-1
-25
475
340
135
25
-40.00
Maximum
Profit at
Hiring 5
workers
What does an Employer do when the price ofLabor Increases? Now Assume market wage is $80 per day and the (average) cost of a watch repair is $25 and total fixedcost is $100.
Watch Repairs
L
TP
MPL
MRP
TR
TC
π
MR
MC
0
0
-
-
0
100
-100
-
-
1
4
4
100
100
180
-80
25
20.00
2
10
6
150
250
260
-10
25
13.33
3
15
5
125
375
340
35
25
16.00
4
18
3
75
450
420
30
25
26.67
5
20
2
50
500
500
0
25
40.00
6
19
-1
-25
475
580
-105
25
-80.00
Maximum
Profit at
Hiring 3
workers
How does an Employer Decide on the Number ofEmployees to Hire?
Conclusion:
As Wages Decrease the Number ofWorkers Hired __________.
As Wages Increase the Number of
Workers Hired __________.
increases
decreases
How does an Employer Decide on the Number ofEmployees to Hire? Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed costis $100.
Watch Repairs
L
TP
MPL
MRP
TR
TC
π
MR
MC
0
0
-
-
0
100
-100
-
-
1
4
4
100
100
160
-60
25
15.00
2
10
6
150
250
220
30
25
10.00
3
15
5
125
375
280
95
25
12.00
4
18
3
75
450
340
110
25
20.00
5
20
2
50
500
400
100
25
30.00
6
19
-1
-25
475
460
15
25
-60.00
Maximum
Profit at
Hiring 4
workers
What does an Employer do when the price of theOutput Increases? Now Assume market wage is $60 per day and the (average) cost of a watch repair is $33 and total fixedcost is $100.
Watch Repairs
L
TP
MPL
MRP
TR
TC
π
MR
MC
0
0
-
-
0
100
-100
-
-
1
4
4
132
132
160
-28
33
15.00
2
10
6
198
330
220
110
33
10.00
3
15
5
165
495
280
215
33
12.00
4
18
3
99
594
340
254
33
20.00
5
20
2
66
660
400
260
33
30.00
6
19
-1
-33
627
460
167
33
-60.00
Maximum
Profit at
Hiring 5
workers
What does an Employer do when the price of theOutput Decreases? Now Assume market wage is $60 per day and the (average) cost of a watch repair is $19 and total fixedcost is $100.
Watch Repairs
L
TP
MPL
MRP
TR
TC
π
MR
MC
0
0
-
-
0
100
-100
-
-
1
4
4
76
76
160
-84
19
15.00
2
10
6
114
190
220
-30
19
10.00
3
15
5
95
285
280
5
19
12.00
4
18
3
57
342
340
2
19
20.00
5
20
2
38
380
400
-20
19
30.00
6
19
-1
-19
361
460
-99
19
-60.00
Maximum
Profit at
Hiring 3
workers
How does an Employer Decide on the Number ofEmployees 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__.
How does an Employer Decide on the Number ofEmployees to Hire? Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixed costis $100.
Watch Repairs
L
TP
MPL
MRP
TR
TC
π
MR
MC
0
0
-
-
0
100
-100
-
-
1
4
4
100
100
160
-60
25
15.00
2
10
6
150
250
220
30
25
10.00
3
15
5
125
375
280
95
25
12.00
4
18
3
75
450
340
110
25
20.00
5
20
2
50
500
400
100
25
30.00
6
19
-1
-25
475
460
15
25
-60.00
Maximum
Profit at
Hiring 4
workers
What does an Employer do when the Fixed CostDecreases? Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixedcost is $80.
Watch Repairs
L
TP
MPL
MRP
TR
TC
π
MR
MC
0
0
-
-
0
80
-80
-
-
1
4
4
100
100
140
-40
25
15.00
2
10
6
150
250
200
50
25
10.00
3
15
5
125
375
260
115
25
12.00
4
18
3
75
450
320
130
25
20.00
5
20
2
50
500
380
120
25
30.00
6
19
-1
-25
475
440
35
25
-60.00
Maximum
Profit at
Hiring 4
workers
What does an Employer do when the Fixed CostIncreases? Now Assume market wage is $60 per day and the (average) cost of a watch repair is $25 and total fixedcost is $120.
Watch Repairs
L
TP
MPL
MRP
TR
TC
π
MR
MC
0
0
-
-
0
120
-120
-
-
1
4
4
100
100
180
-80
25
15.00
2
10
6
150
250
240
10
25
10.00
3
15
5
125
375
300
75
25
12.00
4
18
3
75
450
360
90
25
20.00
5
20
2
50
500
420
80
25
30.00
6
19
-1
-25
475
480
-5
25
-60.00
Maximum
Profit at
Hiring 4
workers
How does an Employer Decide on the Number ofEmployees 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__.