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Ch 4 Firm's Production, Demand for Labor

by: Mitchell Chin

Ch 4 Firm's Production, Demand for Labor Econ 303

Marketplace > University of Illinois at Urbana-Champaign > Economics > Econ 303 > Ch 4 Firm s Production Demand for Labor
Mitchell Chin

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About this Document

Notes this week is shorter considering we had a midterm earlier in the week. This is just notes on a new section talking about maximizing profits with the amount of labor a firm has.
Rui Zhao
Class Notes
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This 2 page Class Notes was uploaded by Mitchell Chin on Friday September 23, 2016. The Class Notes belongs to Econ 303 at University of Illinois at Urbana-Champaign taught by Rui Zhao in Fall 2016. Since its upload, it has received 4 views. For similar materials see Macroeconomics in Economics at University of Illinois at Urbana-Champaign.


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Date Created: 09/23/16
Chapter 4 Firm’s Problem, Demand for Labor A representative firm is a profit maximizer and makes decisions at the margin. Ex: Y = 20K N0.50.5 Capital is fixed at 100 0.5 Y = 200N Y = f(N) Profit = P x Y – W x N P: Price of output (value added) W: Labor input Profit measured in goods (Divide everything by P) Profits/P = Y – W/P x N W/P is wage relative to price of its product For aggregate economy W/P = w, real wage, inflation adjusted wage, purchasing power of monetary wage. Finding the optimal choice of N is the one that maximizes profits Max Y – w x N such that Y <= f(N)<= less than or equal to, >= greater N than or equal to Done by comparing benefits and cost at the margin. Marginal cost of one more worker (in units of goods) is w. Marginal benefits of one more worker is MPL. The optimal choice equates the margins. Profit maximizing firm hires labor to the point where MPL = w Use that equation to find the quantity of labor demanded by a firm. 0.5 Ex: Y = 200N w = 40 MPL = 100N -0.5 25N -0.= 40 Solving for N you get N = 6.25. Take N and plug into Y = 200N find output with that amount of workers. Demand for Labor Demand curve is the same as marginal product curve. Downward sloping demand curve comes from diminishing marginal product of labor. The labor demand curve increases by shifting the curve to the right. If it increases marginal product of labor then it also increases the labor demand curve. Decreasing wage while keeping MPL constant provides movement along the demand curve. Increasing the MPL while keeping wage constant provides movement along the demand curve. An increase of labor demanded does not mean there is an increase of employment. Having an increase of employment and wages at the same time is very difficult to do unless there the firm increases its amount of capital in production. As a result, this shifts the demand curve outwards.


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