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W24 Handout Labor Market Class

The document summarizes the economic models of labor supply and demand. It describes how the labor demand curve is downward sloping due to diminishing marginal product of labor. The labor supply curve is upward sloping because the opportunity cost of leisure is higher at higher wages. The equilibrium wage and employment level are determined by the intersection of these curves. It also discusses how firms determine labor demand by hiring workers up to the point where marginal product of labor equals the wage, and how individuals determine labor supply by weighing the tradeoff between work and leisure.

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34 views4 pages

W24 Handout Labor Market Class

The document summarizes the economic models of labor supply and demand. It describes how the labor demand curve is downward sloping due to diminishing marginal product of labor. The labor supply curve is upward sloping because the opportunity cost of leisure is higher at higher wages. The equilibrium wage and employment level are determined by the intersection of these curves. It also discusses how firms determine labor demand by hiring workers up to the point where marginal product of labor equals the wage, and how individuals determine labor supply by weighing the tradeoff between work and leisure.

Uploaded by

person4115
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Labor Market

Supply and Demand of Labor

• Downward-sloping labor demand: Diminishing marginal product of labor (MPL)


• Upward-sloping labor supply curve: Price of leisure is higher when wages are higher.
• The intersection of labor supply and demand determines the level of employment and
wage rate.

Labor demand curve: The firm’s profit maximization problem derives the labor demand curve.
• Firms hire workers until MPL equals wage rate.
• The wage rate is exogenous to the model.
• Recall that diminishing MPL occurs when we hire more labor while keeping other
inputs (namely capital) constant.
• Eventually, each additional worker will add less additional output than the
previous worker.
Labor supply curve: Labor-leisure trade off
• The opportunity cost of not working is higher with a higher wage. At higher wages,
people are willing to work more.
• Assuming a strictly upward sloping labor supply curve, indicates that the substitution
effect outweighs the income effect for all levels of wages.
• In other words, the higher wages are, the more we will work (the opportunity
cost of missing work is greater).

1
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1. Derive the Labor Demand

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3. Labor supply: the static first order condition

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