Labour Economics

Pages: 7 (1776 words) Published: July 7, 2013
1. Labor Demand curve for Perfect Competition and Labor Demand for Labor for Imperfect Competition

* Table 1.1 Demand for Labor: Firm selling in a Perfectly Competitive Product Market Units of Labor| TP| MP| Product Price, P| Total Revenue, TR| MRP (TR/L)| VMP (MP*P)| 4| 16| | \$2| \$32| | |

5| 28| 12| 2| 56| \$24| \$24|
6| 37| 9| 2| 74| 18| 18|
7| 43| 6| 2| 86| 12| 12|
8| 46| 3| 2| 92| 6| 6|
9| 48| 2| 2| 96| 4| 4|

* X- Axis represents the wage rate and the Y- axis represents the quantity of labor demanded for the given wage rate. MRP curve is the Firms Short Run Demand Curve. Under Perfect competition in the product market, MRP=VMP and the demand curve is downward sloping, because of diminishing marginalproductivity.

* Table 1.2 Demand for Labor: Firm Selling in an Imperfectly Competitive Product Market

Units of Labor, L| TP| MP| Product Price, P| Total Revenue, TR| MRP (TR/L)| VMP (MP*P)| 4| 16| | \$2.70| 43.20| | |
5| 28| 12| 2.50| 70| \$26.80| \$30|
6| 37| 9| 2.30| 85.10| 15.10| 20.70|
7| 43| 6| 2.20| 94.60| 9.50| 13.20|
8| 46| 3| 2.10| 96.60| 2| 6.30|
9| 47| 1| 2.00| 94| -2.60| 2|

* X- Axis represents the wage rate and the Y- axis represents the quantity of labor demanded. Under Imperfect Competition in the product market, the firm’s demand curve will slope downward because marginal product diminishes as more units of labor are added and because the firm must reduce the product price on the units of output as more output is produced. MRP (=MR*MP) for the imperfect competitor is less than the VMP (=P*MP) at all levels of employment beyond the first unit.

* Labor Demand Curve in Perfect competition as well as in Imperfect competition is similar where the Demand Curve is downward sloping in both situations, because of Diminishing Marginal Return. But price differs in two situations where in Perfect Competition firms are price takers where as in Imperfect competition firms are price makers. In perfect competition price is fixed for every level of employment and they do not have the power to influence it. But in the Imperfect competition a single firm has the full power to influence, and change its prices.

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I. Plant Data for a Perfectly Competitive firm at the Wage Rate \$ 400 in the year 2009 L| MPL| Price=MR| MRPL=MR*MPL| W| TC| MWC|
0| …| \$10| …| \$400| 0| ….|
1| 80| 10| \$800| 400| 400| 400|
2| 70| 10| 700| 400| 800| 400|
3| 60| 10| 600| 400| 1200| 400|
4| 50| 10| 500| 400| 1600| 400|
5| 40| 10| 400| 400| 2000| 400|

* Total Cost= Labor*Wage
* Marginal Wage Cost = TC/L
* Equilibrium number of worker is 5
* Total Wage Bill = Wage * No. of workers
5*400=\$2000

II. Plant Data for a Perfectly Competitive firm at the Wage Rage \$ 650 in the year 2010 L| MPL| Price=MR| MRPL=MR*MPL| W| TC| MWC|
0| …| \$10| …| \$650| 0| ….|
1| 80| 10| \$800| 650| 650| 650|
2| 70| 10| 700| 650| 1300| 650|
3| 60| 10| 600| 650| 1950| 650|
4| 50| 10| 500| 650| 2600| 650|
5| 40| 10| 400| 650| 3250| 650|

* Total Cost= Labor*Wage
* Marginal Wage Cost = TC/L
* Equilibrium number of worker is 2
* Total Wage Bill = Wage * No. of workers
2*650=\$1300

* In a Perfectly Competitive market Profit Maximizing output can be achieved where MRP=MWC, but in this situation there is no point where MRP=MWC. MRP is higher than the MWC till the second worker. As their main aim is to maximize profit, firms will hire additional workers as long as each worker adds more to revenue than the cost. If the firm hires the third worker, the firm would be at loss where MWC (Marginal Wage Cost) will be higher than the MRP (Marginal Revenue Product). This means that the cost of the firm is higher than its Revenue, so the firm would prefer labor 2 as their...