The Firm in PC Labor Markets

Objective(s)

• 3. Students should be able to explain why a firm hires labor until MFC=MRPL and identify this point on a cost chart and the graph of a factor market.

• 5. Students should be able to graph the supply and demand of perfectly competitive labor firms and specifically recognize:– that the demand curve is derived from MRPL. – that the supply curve (MFC) is set by the market.– that the intersection of MFC and MRPL represents

the profit maximization quantity of labor. – that certain variables can cause shifts in the supply

and demand of labor firms.

A review…

• How many graphs are needed to show changes to a PC firm that produces and sells its goods in a PC Market?

• 2! One for the market and one for the firm.

• The firm is a “Price-Taker”.

PC Firm’s Take their Wage from the PC Labor Market

PC LABOR MARKET

We are studying Perfectly Competitive Labor Markets

PC Labor Markets

• Many Firms- No Barriers to Entry

• Firms are Wage Takers

• Firms are DEMANDERS

PC Product Markets

• Many Firms- No Barriers to Entry

• Firms are Price Takers

• Firms are SUPPLIERS

What is marginal cost?

• The cost of increasing output by one unit.

Marginal Factor Cost (MFC)

• The cost of each additional factor employed by a firm. With labor, it is:

• Change in Total Factor Cost of Laborers

Change in Laborers

• This equals wage in the PC industry

So if this is my situation…

Laborers Total Factor

Cost

Marginal Factor

Cost

1 20

2 40

3 60

4 80

The firm is a “Wage-Taker”

The Wage in a PC Firm • The Equilibrium

Wage in the PC Labor Market Sets the Wage for the PC Firm

• Firms are “wage-takers”

• The Eq. Wage = MFC = Supply for the firm

Wages

Quantity of Laborers

S= MFC

Recall: What is MRP?

MRP: Marginal Revenue Product of Labor. What is it?

Marginal Revenue Product of Labor (MRP)

MRP= MPL (Marginal Product of Labor)X

P (Price of the Good)

The Firm’s Demand Curve &The Market Demand for Laborers

• The market’s demand for labor is equal to all firms in the market’s demand for labor.

•

• The firm hires workers at a wage that does not exceed their marginal revenue product of labor.

D= MRP

Wages

Quantity of Laborers

If the Product Price is $2 and the Wage is $20 then how many workers should this PC Firm hire?

Explain.

Laborers Output Marginal

Product of Labor

Marginal Revenue Product

Wage=

MFC

1 15 15 $30 $20

2 29 14 $28 $20

3 42 13 $26 $20

4 50 8 $16 $20

5 55 5 $10 $20

Recall: Why is profit maximized when MR=MC?

PC Firm Monopoly

Supply and Demand for a Firm in a PC Labor Market

• Demand is equal to MRP

• You maximize Profit/ Minimize Costs where MFC=MRP– Hire workers

until MFC=MRP– Hire less if

MRP < MFC– Hire more if

MRP > MFC

S=MfC

Wage

Quantity of Laborers

D=MRp

Eq.W

Eq. Q

Add the MRP curve

The Whole Thing Together

PC Labor Market PC Firm in Labor Market

Compare and contrast PC Labor markets and firms to PC Product market and firms.

Practice…1. How many workers should this firm hire?

2. How do you know this?Price= $10 Wage=$60

Labor Units

Total Output

Marginal Product of Labor

MRP MFC

1 5

2 20

3 30

4 35

5 35