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Labour Economics

This document discusses labour economics and the labour market. It introduces important concepts like labour demand, which is derived from the demand for the goods and services labour helps produce. Profit maximization and marginal revenue productivity are also covered, explaining how firms determine optimal employment levels. The summary concludes by noting that monopoly and monopsony power in the market tend to reduce a firm's demand for labour.

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16 views41 pages

Labour Economics

This document discusses labour economics and the labour market. It introduces important concepts like labour demand, which is derived from the demand for the goods and services labour helps produce. Profit maximization and marginal revenue productivity are also covered, explaining how firms determine optimal employment levels. The summary concludes by noting that monopoly and monopsony power in the market tend to reduce a firm's demand for labour.

Uploaded by

mayada
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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LECTURE II

LABOUR ECONOMICS
Some important questions

 Why does a top professional footballer earn


so much more than a professor?
 Why does an unskilled worker in the EU
earn more than an unskilled worker in
India?
 Why do market economies not manage to
provide jobs for all their citizens who want
to work?
 Why are different methods of production
used in different countries?
2
INTRODUCTION
 Laboureconomics is the study of the
market for labour services in the
economy.
 The actors in the labour market
includes;
 Households

 Firms

 Government
 The interaction between these
players in the labour market
determines;
I. Equilibrium price
 The wage that workers receive
II. Equilibrium quantity
 The amount of work that people
do in the economy
Labour Demand

 Labour demand is the need for employees and workers in a


particular job at a given time
 The demand for labour comes from the employees
 The demand for labour is a derived demand
 That is, it is derived from the demand for the product or
service that the labour is helping produce.
 The demand for hamburgers leads to the demand for hamburger
workers.
 Factors Affecting labour demand
I. Wage rate
II. Unit cost of capital
III. Selling price of output
Profit Maximization

 Economic profit = TR-TC


 Adding a worker increases TR and
increases TC;
 A firm will add more labour if TR rises by
more than TC
 A firm can increases its profits by using
less labour if the additional revenue
generated by the last workers is less than
the additional cost of adding that
workers.
Marginal Revenue Production

 MRP is the additional revenue that


results from the use of an additional
unit of labour.
Assumption of marginal revenue
productivity
1. Workers are homogeneous in terms of
their ability and productivity.
2. Trade unions have no impact on the
available labour supply.
3. Firms have no buying power when
demanding workers
4. The physical productivity of each worker
can be accurately and objectively
measured
5. Workers can be hired at a constant wage
rate
Marginal Factor Cost (MFC)

 MFC is the additional cost associated


with the use of an additional unit of
labour
Under perfect competition, with
diminishing marginal productivity;
The firm maximizes profit when the
marginal cost of employing an extra
worker equals the MVPL.
This occurs at E where wage=MVPL.
Employment is L2.
Below L2, extra employment adds more
to revenue than to labour costs.
Above L2, the reverse is so.

The decision is consistent


with the MR=SMC rule for miximizng
profit under perfect
competition.
Monopoly and monopsony power (2)

Under perfect competition,


a firm sets MVPL = W0
and employs L1 workers.

W0 Facing a downward-
sloping demand curve
for its product, the firm
MVPL sets MRPL = W0
MRPL
and employs L3 workers.
L3 L1 Employment

36
Monopoly and monopsony power (3)

£ A monopsonist recognises
that additional employment
MCL bids up wages for existing
workers, so MCL shows the
marginal cost of an extra
worker.
W0

Facing a given goods


price, the monopsonist
MRPL MVPL sets MCL = MVPL and
employs L2 workers.
L3 L2 L1 Employment
37
Monopoly and monopsony power (4)

£ For a monopsonist who


also faces a downward-
MCL sloping demand curve
for the product, MCL
is set equal to MRPL to
employ L4 workers.
W0
So monopoly and
monopsony power
both tend to reduce
MRPL MVPL the firm’s demand
for labour.
L4 L3 L2 L1 Employment

38

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