all rights reservedmicroeconomics © oxford university press malaysia, 2008 13– 1

All Rights ReservedMicroeconomics© Oxford University Press Malaysia, 2008

13– 1


13– 2

Labour and Wages

CHAPTER

13


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INTRODUCTION

Cobb-Douglas production model that shows the relationship between inputs and outputs is formalized by a production function of the formQ = f (K,L,M), where

• Q represents the firm’s output of a particular good during a period.

• K represents capital.• L represents labour input.• M represents raw material.


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FOUR FACTORS OF PRODUCTION AND THEIR

PAYMENTS

• Land - Rent

• Labour - Wages

• Capital - Interest

• Entrepreneurship - Profit


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PAYMENT FOR FACTORS OF PRODUCTION

• When a new Information Technology (IT) college is set up to produce graduates for human capital specializing in IT, it needs lecturers to teach IT courses (mental labour), the physical space on which a college sit (land), a building, class room furniture and teaching enable classroom (capital), and the head of college or the CEO to manage the college (entrepreneurship).


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Derived DemandFirm’s demand for factors of production derived from its decision to supply a good in another market.

Joint DemandProduction needs more than one factor of production.

TYPES OF DEMAND FOR FACTORS OF PRODUCTION


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THEORY OF MARGINAL PRODUCTIVITY

The demand for a factor depends on its marginal revenue product. The greater the productivity of the factor, the greater will be the demand for that particular product, ceteris paribus.


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CONCEPTS IN MARGINAL PRODUCTIVITY

Total Physical product (TPP): The total output produced by employing the factors of production.

Marginal Physical Product (MPP): The additional of total product as a result of employing one more unit of a factor.


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Total Revenue Product (TRP): Total revenue gained by employing factors of production.

Marginal Revenue Product (MRP): The additional total revenue as a result of employing one more unit of an input. It is also the demand curve of the factor and it is a downward sloping because of the law of diminishing return.

CONCEPTS IN MARGINAL PRODUCTIVITY (CON’T)


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Monopolistic competition: MRP = MPP X MR

Perfect competition: MPP X P/AR/ MR

Marginal value product (MVP): Marginal product of an input times the prices of the output.

MVP = MPP X P

CONCEPTS IN MARGINAL PRODUCTIVITY (CON’T)


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DETERMINATION OF EQUILIBRIUM PRICE OF A FACTOR

Labour markets are determined by the forces of demand and supply.

The supply and demand for tomato pickers will determine the price wage and the number of tomato pickers.


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Panel (a) shows how the supply and demand for tomatoes determine the prices of tomatoes

THE VERSATILITY OF DEMAND AND SUPPLY

Supply and demand for tomato pickers determine the wage of the tomato pickers


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Panel (b) shows how the supply and demand for tomatoes determine the wage of the tomato pickers

THE VERSATILITY OF DEMAND AND SUPPLY (CON’T)


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WAGES AND WAGE DIFFERENTIAL

According to the Oxford Dictionary of Economics, wage is a payment for work performed by an employee.

Wage differential is the difference in wage rates between two types of worker. It may be on account of different levels of skill, formal qualifications, between unionized and non-unionized firms, or between workers of different age, sex, or ethnic groups.


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CHANGE IN WAGE RATE

Will change the motivation of individual to work longer hours.

For example, with higher wage, people will agree to work overtime, less entertainment or leisure hours, or might retire later.

Positively sloped and positive relationship between wage rate and labour supply.


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TERM OF WAGES

Nominal wages refer to the wage or salary in terms of the particular currency of a country, in case of Malaysia is RM.

Real wages refer to the purchasing power. For example, if a singer earns RM5000 for each concert, in terms of real wages it means how much the singer can purchase with that amount of income.


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DEMAND FOR LABOUR: THE MARGINAL PRODUCTIVITY THEORY

Question: How many tomato pickers will be employed by the owner?

The firm will answer this question by weighing up the costs of employing an extra labour against the revenue. In the labour markets, the firm will maximize profits where the marginal cost of hiring an extra worker equals the marginal revenue that the worker’s output earns for the firm.


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The profit-maximizing approach

MC labour = MR labour

DEMAND FOR LABOUR: THE MARGINAL PRODUCTIVITY

THEORY (CON’T)


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MEASUREMENT OF MARGINAL COST AND REVENUE OF LABOUR

Marginal factor cost (MFCL): The amount an additional unit of variable unit (L) adds to the total cost.

Marginal revenue of labour (MRPL): The amount an additional unit of the variable input (L) adds to total revenue.

MFCL = Q TC/ L

MFLL = MPPL X MPQ


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OPTIMAL USE OF VARIABLE INPUT (L)

The optimal level occurs at the point where the marginal benefits are equal to the marginal costs.


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THE PROFIT MAXIMIZING LEVEL OF EMPLOYMENT FOR A FIRM

• The profit maximizing level is at point a.


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THE PROFIT MAXIMIZING LEVEL OF EMPLOYMENT FOR A FIRM (CON’T)

Average and marginal physical product


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DERIVATION OF THE FIRM’S DEMAND CURVE FOR LABOUR

Wage rate at three different levels


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FACTORS THAT AFFECTTHE POSITION OF THE DEMAND FOR LABOUR

• Wage rate

• Productivity of labour

• Demand for the good


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DERIVATION OF THE INDUSTRY DEMAND CURVE FOR LABOUR

When more workers are being employed, the total industry output will increase, and hence P (and MR) will be pushed down


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LABOUR SUPPLY

Labour is provided to labour markets by individuals who choose among available employment opportunities.

A rational individual will refuse to work long hours, take early retirement and choose to work freelance.


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UTILITY MAXIMIZATION

A person maximizes utility by choosing H* hours of leisure and consumption of C*


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THE OPPORTUNITY COST OF LEISURE

People have to bear the cost for each hour they do not work and it should be the real wage.

Real wage is that people can turn their earnings into actual consumer goods.


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INCOME EFFECT OF A CHANGE IN THE REAL WAGE

Income Effect (IE): A rise in wage tends to increase leisure. Since leisure is a normal good, the higher income resulting from a higher w increases the demand for it.


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SUBSTITUTION EFFECTS OF A CHANGE IN THE REAL WAGE

(CON’T)

Substitution Effect (SE): Effect of increase in w on the hours of leisure is to reduce it. As leisure becomes more expensive, there is reason to consume less of it.


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Figure 13.7 illustrates two different reactions to an increase in w

EFFECT OF AN INCREASE IN WAGE RATE


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MARKET SUPPLY CURVE FOR LABOUR

• Labour supply curves will always have positive slopes if people are willing to assume that in most substitution effects of wage changes will be more important than income effects.

• SE>IE

all rights reservedmicroeconomics © oxford university press malaysia, 2008 13– 1

Documents

factors of production

supply cont slide

case of malaysia

supply supply

versatility of demand

factor of production

types of demand

labour supply