Labor Economics Chapter 3 – Flashcards
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Perfectly Competitive Markets
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Firms have no control over the price or the wage and can only effect the marginal product of labor
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Why does the demand curve slope down in short run
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Law of Diminishing Returns means that as labor increases, the marginal product of labor increases, which means that wages demanded will go down as quantity of labor rises
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When MRPL > ME of labor
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Firm will employ more people, create more output, increase profits by MRPL - ME and therefore had not yet maximized their profit
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When MRPL < ME
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Firm will lay people off, increase profits by MEL - MRPL so profits weren't maximized to begin with
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When MRPL = ME
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Profits Maximized
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Profit Maximization Rule for a Firm
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1. MRPL=W 2. MRPL decreasing as Labor is increasing
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Horizontal Summation
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At each wage, sum of all firms labor demand to get market quantity demanded
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Substitution Effect
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If relative price of one input falls, firm substitutes away from that input
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Scale Effect
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If overall costs fall, the price of output falls, quantity of output increases, so firm will use more of all inputs
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Gross Substitutes
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wage decrease leads to decrease in capital and cost of capital decrease leads to decrease in labor and vice versa -In this case, the substitution effect will be greater than the scale effect
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Gross Complements
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If the price of one input decreases, you use more of both inputs...in this case, the scale effect is greater than the substitution effect
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Isoquants
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every point on an isoquant produces the same amount of output Note: Can't cross each other for different outputs
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Shifts in Isoquants
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Increase in Output shifts isoquants to the right
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Steeper ( more up and down) Isoquant curve
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Means more gain in capital is necessary to keep output constant and a more labor-intensive production process because more capital is needed to replace a unit of labor if Citi s a steeper curve
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Very Curved Isoquant
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Inputs go together and are complements
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Very Smooth isoquants (more linear)
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Labor and Capital are substitutes
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Perfectly Linear Isoquant
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Perfect Substitutes
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Isoquant forms Right angle
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Perfect Complements
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Isocost Curve Wage Increase
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Steeper slope, relative price of labor increases, relative price of capital decreases
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Isocost Curve Capital Increase
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Flatter slope, relative price of labor decreases, relative price of capital increases
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Isocost curve
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all points give the same costs for a firm
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Effect of Wage increase on Isocost holding output constant
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Isocost curve is steeper and shifts to the left as K increases and Labor decreases (substitution effect)
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Quasi-Fixed Costs
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Per person labor costs that do not vary in hours per work for each employee (hiriing costs, health insurance, etc.)
