lecture 1o lbr mrkt

8/6/2019 Lecture 1o lBR Mrkt

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MS 201/401 - Principles of Macroeconomics

Lecture 10

Recommended books:

1 . Macroeconomics by N. G Mankiw

2. Mac« ««««««.by M Swann



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Labor marketLabor markets, like other markets in the economy, aregoverned by the forces of supply and demandThe market for a factor of production - labour

Refers to the demand for labour ± by employers and the supplyof labour (provided by potential employees)

The demand for labour isdependent on the demandfor the final product thatlabour produces.Thegreater the demand foroffice space the higher thedemand for construction

workers .



THE D E MAND FOR LABOR

Demand for labour is a derived demand -not wanted for its own sake but for whatit can contribute to production

D emand for Labour

Influenced by:y Cost of hiring laboury Wages/salariesy Administration costs associated with tax

payments and adhering to employment lawsand regulations



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T he Labour Market

Wage Rate (£ per week)

Quantity of labour employed

D L

The demand for labouris downward slopingfrom left to right£250

Q1

At a relatively highwage rate of £250 perweek, the value addedby the worker must begreater to cover the costof hiring that labour.

D emand is likely to belower.

£100

Q2

At a lower wage rate thefirm can afford to take onmore workers. The demandfor labour is inverselyrelated to the wage rate

D L1

Q3 Q4

The demand for labour will shiftif:

Productivity of labourincreases

New machinery is used whichincreases productivity

If there is an increase in thedemand for the good/serviceitself

If the price of the good/serviceincreases



Figure 1 T he of Supply and Demand

Quantity of DVD

0

Pr ice of DVD

Demand

Supply

Demand

Supply

Quantity of Enginee rs

0

Wage of Enginee r

(a) The Ma rk et fo r DVD (b ) The Ma rk et fo r Enginee rs

P

Q L

W



Figure 2 T he Production Function

Pro ducti onfuncti on

Quantity of Enginee rs

0

QuantityDVD

300280

240

180

100

1 2 3 4 5



T he Value of the Marginal Product and theDemand for Labor

T he v alue of the marginal product (alsoknown as marginal revenue product) ismeasured in dollars.I t diminishes as the number of workersrises because the market price of the goodis constant.T o maximize profit, the competitive, profit-maximizing firm hires workers up to thepoint where the value of the marginalproduct of labor equals the wage.

VMPL = Wage

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Production Function and the MarginalProduct of Labor

D emand closely linked with the v alue of the product produced bylabour

Productivity:A measure of output per person per time period

Total Output

Productivity = --------------------Quantity of Factor



T he Value of the Marginal Productand the Demand for Labor

M arginal Revenue Product ² T he value of themarginal product is the marginal product of theinput multiplied by the market price of theoutput.

VMPL = MPL v P

T he value-of-marginal-product curve is the labordemand curve for a competitive, profit-maximizing firm.



Figure 3 T he Vaue of the Marginal Product of Labor

C opy r ight©2003 Southwe s te r n/Thom s on Lea r ning

0 Quantity of Enginee r

0

Valueof the

Ma r ginalPr oduct

Value of ma rg inal p roduct(demand cu rve f or lab or)

Ma rketwa ge

Pro fit-maximizin g quantity



Figure 4 E quilibrium in a Labor Market

Wage(p r ice of

la b o r )

0 Quantity of La b o r

Supply



What cause Labour-Demand and Supplyto Shift

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D emand Shifters1. Output Price2. Technological Change3. S upply of Other factors

Supply shifters1. Changes in Tastes2 . Changes in Alternative Opportunities3 . I mmigration



Figure 4 E quilibrium in a Labor Market


Wage(p r ice of

la b o r )


Supply

Demand

Equilib r iumwa ge, W

Equilib r iumempl oyment, L



Shifts in Labor Supply

An increase in the supply of labor :y Results in a surplus of labor.y Puts downward pressure on wages.y

Makes it profitable for firms to hire more workers.y Results in diminishing marginal product.y Lowers the value of the marginal product.y Gives a new equilibrium.



Shifts in Labor Demand

An increase in the demand for labor :y Makes it profitable for firms to hire more workers.y Puts upward pressure on wages.y

Raises the value of the marginal product.y Gives a new equilibrium.



Figure 6 A Shift in Labor Demand


Wage(p r ice of

la b o r )


Supply

Demand, D

2. . . . inc r easesthe wa ge . . .

3. . . . and inc r eases empl oyment.

D

W

L

W

L

1. An inc r ease inlab or demand . . .



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Shift in Supply and Demand for labor

Wage Rate (£ per hour)

Number Employed

D L

S L

30

Q1

Assume this isthe market forInternetdevelopers ± the

initial wage rate is£30 per hour

D L1

As businessesrecognise thepotential benefitsof having a Web

site, demand fortheir skillsincreases from D to D 1

Q2S hortage

The demand fordevelopers at awage rate of £30per hour is now Q2

but there are stillonly Q1 availablefor employment. Ashortage develops.

In the shortrun, the supplyof internetdevelopers isvery inelastic75

The shortage causesthe wage rate to beforced up to £75 perhour as firms competefor the skills of thoseavailable. In the shortrun there is not thetime for new workersto come onto themarket because of thetraining time needed.

S L1

50

Q3

In the long run, asmore people trainand qualify tobecome internetdevelopers, the

supply will increaseand also becomemore elastic. Thewage rate will fallback to a lowerlevel.



H ow the P hillip s C u rv e i s Related to the Modelof Agg r egate Demand and Agg r egate Supply...

Phillips curve

0

(b) The Phillips Curve

Inflation Rate

(percent peryear)

UnemploymentRate (percent)

0

(a) The Model of AD and AS

Price Level

Low AD

High AD

B

4

6

(output is8,000)

A

7

2

(output is7,500)

A

7,500

102

B

8,000

106

Sho rt-run AS



AS 2

1. An adverseshift in aggregate

supply

An Adverse Shock to Aggregate

Supply...

Q uantity of Output

0

Pr iceLevel

P 1

Agg r egatedemand

(a) The Model of AggregateDemand and Aggregate Supply

U nempl oyment Rate0

(b) The Phillips Curve

A

Inflati onRate

P hillip s cu rv e, PC 1

Agg r egates upply, AS 1

A

Y 1

P 2

3 . and raises theprice level

B

2. l ow ers o utput

Y 2

B

4 . giving p o licymakersa less fav o rable trade o ff

bet w een unempl o yment and inflati o n .

PC 2



Assignment 4

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On the foundations of Aggregate demand ,Supply and labor market show:

y What will be the impact of Dimaer Dam labormarket?

y What will be the impact of coal reserves whenutilized for energy?

y Do you find any trade off between the above twokinds of energy production, which one is suitable tofor Pakistan and why ?

y What kind of additional cost these technologies canhave, if you have any other alternative way to reducecost and still production , explain it.

lecture 1o lbr mrkt

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