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Labor Demand

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Labor Demand

Post  SamPan on Thu Feb 04, 2010 5:16 am

In light of the limits that have been placed on this answer I will only focus my comments on the demand for labor and on the other hand the supply of labor. First the demand for labor. This is to me by far the most interesting aspect of the course. Labor demand is derived from the firms desire to maximize profits. This is a basic assumption of labor demand. Will the firms continually try to make changes that will improve the profitability of the firm? We assume that yes they will. Firms are basically price takers. Now their main decision is what quantity of their product to produce. This is because as they hire more people they basically increase output so the decision hire more people and the decision to produce more are basically the same decision. The optimal output will equate marginal revenue with marginal cost. Marginal revenue is the product price in a purely competitive market. Marginal cost is therefore the cost to produce that unit. MPl is the change in output of the firm. What happens when a firm decides to produce more? They must hire more labor assuming that capital remains constant. If a firm could continuously hire more peole and increase their MRP then we would live in a utopian society with no unemployment and peace and happiness everywhere. But alas we live in a world with diminishing returns and as the firm highers more people it reaches a pont where each new person costs a little more when compared with their output then the person hired before them. A good example of this is digging a hole 4 feet by 8feet by 6feet . One person would do it in about half the time that two people could do it. But three people would not do it in one third of the time. This loss in efficiency is what I am talking about. In fact soon you couldn㦙 fit all of he people into the hole and it would be so cramped that it would atually take longer to finish the hole. If this happened then they would have a negative marginal product of labor. So the firm should keep hiring people until its marginal revenue product exceeds its marginal expense. But can they get people to come to their camp? Some time scarcity in the labor force pushes the wage ratre up and this increases the marginal expense this will shift the employment level and reduce the amount that the firm is willing to hire unless at the same time marginal revenue product goes up. This will have the opposite effect and keep employment up. But under most circumstances one of these moves more than the other and a new equilibrium is found. What this can really be used for in my personal life is the determination of wages. Before this class I had no idea how I would decide how may people to hire. Now I know that if I hire two people for 10 dollars per hour then they had better be adding at least x*$10 per hour to my company. What a bonus it was to end up taking your class and have something that I can immediatley put to use in the


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