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Labour
Economics
Introduction
• Labour economics is the study of the market
for labour services in the economy
• The actors in the labour m...
• The interactions between these players in the
labour market determines;
I. equilibrium price
- the wage that workers rec...
Labour Demand
• Labour demand is the need for employees
and workers in particular job in given time
• The demand for labou...
Profit maximization
• Economic profit = TR - TC
• By adding a worker;
TR TC
• A firm will add more labor if;
TR > TC
Marginal Revenue Production
MPR is the additional revenue that results
from the use of an additional unit of labor
MRP = T...
Assumptions of marginal revenue
productivity
1. Workers are homogeneous in terms of their
ability and productivity
2. Trad...
Marginal Factor Cost (MFC)
• MFC is the additional cost associated
with the use of an additional unit of labor
MFC = TC
L
MRP, MFC & Profit Maximization
• A firm will use more labor if MRP > MFC
• A firm will use less labor if MRP < MFC
• A fir...
Labour Output
(Q)
MP price ($) MRP ($) MFC ($) Hire or
not
0 0 - 10 -
1 5 5 10 50 20 Hire
2 12 7 10 70 20 Hire
3 16 4 10 4...
Derivation of MRP curve
MRP = TR
L
MRP = MR MP
MR = TR MP = Q
Q L
MRP = TR = TR Q
L Q L
Derivation of MRP curve cont’ –
MP curve
MP
Quantity of Labor
Derivation of MRP curve cont’ –
MR curve
• Perfect Competition
P = MR = AR
MR
Quantity of output
MRP curve
MRP
Quantity of Labor
MRP curve =Demand Curve
Law of Diminishing of Returns
• Every additional unit of labor will yield a
higher MR for a while
• Eventually MR starts t...
Derivation of MFC curve
• In a perfectly competitive labor market,
MFC = w
RealWageRate
Units of labour
MFC = w
Short run Labour Demand Curve in a
Perfectly Competitive Market
RealWageRate
L3L2L1
W
Units of labour
MFC = w
RealWageRate
Units of labour
MFC1
L3L2L1
MFC2
MFC3
W2
W1
W3
Short run Labour Demand Curve in a
Perfectly Competitive Market
W2
Demand for LabourRealWageRate
W3
W1
Units of labour
L3L2L1
MRP curve =Demand Curve
RealWageRate
Units of labour
Shifts in demand curve
E0
W0
L0
D0
D1
D3
L2 L1
S
W1
W2
Rightward shift of demand curve due to;
 Increase in labour productivity
 Higher demand for the final product
 Lower pr...
Labour Supply
• Supply of labor is the total hours (adjusted
for intensity of effort) that workers wish to
work at a given...
Basic concepts: measures and definitions
• Employed (E) : if a person works for pay for more
than one hour per week
• Unem...
• Labour Force (LF) = employed(active) +
Unemployed(active)
• Individuals who are neither employed or
unemployed called in...
• Unemployment rate = the ratio between the
total number of unemployed and those in
the labour force
ur = U/LF
• Labour ma...
Supply Curve
RealWageRate
Units of labour
W3
W2
W1
L1 L2 L3
Supply Curve
Factor affecting on labour supply
 Workers decide whether, to work or not to
wor & time of work
 It depends on the incom...
Substitution effect
IC2
IC1
No of leisure hrs per period of time
Income
per period
of time
Y1
Y2
A
B
X0
YA
YB
XA XB
Income Effect
IC2
IC1
No of leisure hrs per period of time
Income
per period
of time
Y1
Y2
A
B
X
YA
YC
YB
XA XB XC
C
• Higher wages attract labours to work more
• Because it makes more money
• As the wage rate rises, there are two things
g...
2. Income effect
 Higher wages lead to an increment of the
individual's real income
 Some people continue to earn high a...
Backward bending supply curve of labour
RealWageRate
W
W 1
W2
XX1 X2
Substitution effect
Income effect
Units of labour
Market Equilibrium
RealWageRate
Units of labour
W0
L0
E0
Supply curve
Demand curve
Monopsony
• A labor market in which there is only one
firm demanding labor is called a monopsony
• The single firm in the ...
Supply curve facing a monopsonist
RealWageRate
Units of labour
MFC
S
A monopsony firm faces the entire market labor
supply...
Wage & Employment
determination under a monopsony
RealWageRate
MFC
S
MRP
W0
Units of labour
L0
Trade union in a monopsony
RealWageRate
Units of labour
W0
L0
W1
L1
S
MRP
MFC
Trade union in a monopsony
RealWageRate
Units of labour
W0
L0
W1
L1
MFC
S
MRP
Minimum wage in a monopsony
RealWageRate
Units of labour
W0
L0
W1
L1
MFC
S
MRP
Unemployment
RealWageRate
Units of labour
W0
L0
E0
S
D1
W1
L S
D2
E1
L D
Surplus of workers
(unemployment)
W0
L0
RealWageRate
Units of labour
W2
Ls
D1
D2
E0
S
Labour Shortage
L D
Shortage
L D
Group Members
 D.N. Nanayakkara UWU/EAG/11/0028
 K.H.M.A.P. Kariyawasam UWU/EAG/11/0006
Thank You!
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Labour economics

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This presentation is done by Export Agriculture students in Uva Wellassa University.

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  • dulminie, may i know what tr and tc mean?? thank you so much!
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  • @Shriyani C. Udugama You are Welcome! Pleasure to hear such things.
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  • Dulminie, Thanks. ur' ppt. on labour economics is very useful to me s I never studied econ.
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Labour economics

  1. 1. Labour Economics
  2. 2. Introduction • Labour economics is the study of the market for labour services in the economy • The actors in the labour market includes; Households  Firms  Government
  3. 3. • The interactions between these players in the labour market determines; I. equilibrium price - the wage that workers receive II. equilibrium quantity - the amount of work that the people do in the economy
  4. 4. Labour Demand • Labour demand is the need for employees and workers in particular job in given time • The demand for labour comes from the employees Factors affect for labour demand I. Wage rate II. Unit cost of capital III. Selling price of output
  5. 5. Profit maximization • Economic profit = TR - TC • By adding a worker; TR TC • A firm will add more labor if; TR > TC
  6. 6. Marginal Revenue Production MPR is the additional revenue that results from the use of an additional unit of labor MRP = TR L
  7. 7. Assumptions 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
  8. 8. Marginal Factor Cost (MFC) • MFC is the additional cost associated with the use of an additional unit of labor MFC = TC L
  9. 9. MRP, MFC & Profit Maximization • A firm will use more labor if MRP > MFC • A firm will use less labor if MRP < MFC • A firm maximizes its profit at the level of labor use at which MRP = MFC
  10. 10. Labour Output (Q) MP price ($) MRP ($) MFC ($) Hire or not 0 0 - 10 - 1 5 5 10 50 20 Hire 2 12 7 10 70 20 Hire 3 16 4 10 40 20 Hire 4 17 1 10 10 20 Not hire 5 15 -2 -- -- --
  11. 11. Derivation of MRP curve MRP = TR L MRP = MR MP MR = TR MP = Q Q L MRP = TR = TR Q L Q L
  12. 12. Derivation of MRP curve cont’ – MP curve MP Quantity of Labor
  13. 13. Derivation of MRP curve cont’ – MR curve • Perfect Competition P = MR = AR MR Quantity of output
  14. 14. MRP curve MRP Quantity of Labor MRP curve =Demand Curve
  15. 15. Law of Diminishing of Returns • Every additional unit of labor will yield a higher MR for a while • Eventually MR starts to increase at a decreasing rate • Then MRP = MFC • Finally MR decreases
  16. 16. Derivation of MFC curve • In a perfectly competitive labor market, MFC = w RealWageRate Units of labour MFC = w
  17. 17. Short run Labour Demand Curve in a Perfectly Competitive Market RealWageRate L3L2L1 W Units of labour MFC = w
  18. 18. RealWageRate Units of labour MFC1 L3L2L1 MFC2 MFC3 W2 W1 W3 Short run Labour Demand Curve in a Perfectly Competitive Market
  19. 19. W2 Demand for LabourRealWageRate W3 W1 Units of labour L3L2L1 MRP curve =Demand Curve
  20. 20. RealWageRate Units of labour Shifts in demand curve E0 W0 L0 D0 D1 D3 L2 L1 S W1 W2
  21. 21. Rightward shift of demand curve due to;  Increase in labour productivity  Higher demand for the final product  Lower price of a substitute input (capital) Leftward shift of demand curve due to; Decrease in labour productivity Lower demand for the final product Higher price of a substitute input (capital)
  22. 22. Labour Supply • Supply of labor is the total hours (adjusted for intensity of effort) that workers wish to work at a given real wage rate
  23. 23. Basic concepts: measures and definitions • Employed (E) : if a person works for pay for more than one hour per week • Unemployed (U) : if a person must have used at least one active method to look for a job in the last four weeks or the person must be willing to start a job and able to take one up within two weeks if offered one
  24. 24. • Labour Force (LF) = employed(active) + Unemployed(active) • Individuals who are neither employed or unemployed called inactive or out of the labour force (NLF) • These include pensioners, students and those who serve in the military in the countries with compulsory draft • Working age population (P) = LF + NLF
  25. 25. • Unemployment rate = the ratio between the total number of unemployed and those in the labour force ur = U/LF • Labour market performance; lfpr = LF/P • Employment to population rate = ratio of total employment to total working age population epr = E/P
  26. 26. Supply Curve RealWageRate Units of labour W3 W2 W1 L1 L2 L3 Supply Curve
  27. 27. Factor affecting on labour supply  Workers decide whether, to work or not to wor & time of work  It depends on the income & leisure  There are two effects on labour supply 1.Substitution effect 2.Income effect
  28. 28. Substitution effect IC2 IC1 No of leisure hrs per period of time Income per period of time Y1 Y2 A B X0 YA YB XA XB
  29. 29. Income Effect IC2 IC1 No of leisure hrs per period of time Income per period of time Y1 Y2 A B X YA YC YB XA XB XC C
  30. 30. • Higher wages attract labours to work more • Because it makes more money • As the wage rate rises, there are two things going on… 1. Substitution effect  Worker will offer himself for more hours  The price of 'leisure' has become relatively expensive  So the worker will substitute 'leisure' hours for 'work' hours  It always have a positive relationship
  31. 31. 2. Income effect  Higher wages lead to an increment of the individual's real income  Some people continue to earn high amount of money  But majority wants to spend more leisure time since they have enough money  Demand for leisure starts to rise  As a result, demand for working hours decreases
  32. 32. Backward bending supply curve of labour RealWageRate W W 1 W2 XX1 X2 Substitution effect Income effect Units of labour
  33. 33. Market Equilibrium RealWageRate Units of labour W0 L0 E0 Supply curve Demand curve
  34. 34. Monopsony • A labor market in which there is only one firm demanding labor is called a monopsony • The single firm in the market is referred to as the monopsonist
  35. 35. Supply curve facing a monopsonist RealWageRate Units of labour MFC S A monopsony firm faces the entire market labor supply curve MFC > w
  36. 36. Wage & Employment determination under a monopsony RealWageRate MFC S MRP W0 Units of labour L0
  37. 37. Trade union in a monopsony RealWageRate Units of labour W0 L0 W1 L1 S MRP MFC
  38. 38. Trade union in a monopsony RealWageRate Units of labour W0 L0 W1 L1 MFC S MRP
  39. 39. Minimum wage in a monopsony RealWageRate Units of labour W0 L0 W1 L1 MFC S MRP
  40. 40. Unemployment RealWageRate Units of labour W0 L0 E0 S D1 W1 L S D2 E1 L D Surplus of workers (unemployment)
  41. 41. W0 L0 RealWageRate Units of labour W2 Ls D1 D2 E0 S Labour Shortage L D Shortage L D
  42. 42. Group Members  D.N. Nanayakkara UWU/EAG/11/0028  K.H.M.A.P. Kariyawasam UWU/EAG/11/0006
  43. 43. Thank You!

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