Long Run Labor Demand
K
E x p a n s io n L in e
K1
Q1
Ko
Qo
L
L1
Lo
Lectures in Microeconomics-Charles W. Upton
The Short Run Demand
For Labor
$
• The VMP curve is
the short run labor
demand curve.
• When the wage rate wo
is wo, Lo workers are
w1
demanded
• When the wage rate
is w1, L1 workers are
demanded
Long Run Labor Demand
Lo
L1
L
Long Run Labor Demand
K
Lets see what
happens when the
firm can change its
other input.
Ko
Qo
Long Run Labor Demand
L
L
Long Run Labor Demand
K
Lets see what
happens when the
Herechange
is the initial
firm can
its
production
other input.isoquant
Ko
Qo
Long Run Labor Demand
L
L
Long Run Labor Demand
K
Now the firm
expands and moves
to Q1
K1
Q1
Ko
Qo
Long Run Labor Demand
L
L
L
Long Run Labor Demand
K
Now the firm
expands and moves
to Q1that here the
Note
demand for labor
has declined!
Q1
K1
Ko
Qo
Long Run Labor Demand
L
L
L
Long Run Labor Demand
K
Expansion Line
K1
Q1
Ko
Qo
Long Run Labor Demand
L
L
L
Long Run Labor Demand
K
Expansion Line
K1
We would
normally
expect an
Q1
increase in
output to lead
to a increased
Qo
demand for
L
both factors.
Long Run Labor Demand
Ko
L
L
Long Run Labor Demand
K
Expansion Line
K1
We would
That need
not
be the normally
case.
expect an
Q1
increase in
output to lead
to a increased
Qo
demand for
L
both factors.
Long Run Labor Demand
Ko
L
L
K
The Effect of a Change in Wage
Rate
Let’s see what
happens when
wages change.
Initially the firm is
employing L*
workers.
w
L*
L
Long Run Labor Demand
K
The Effect of a Change in Wage
Rate
w
w`
L*
L**
L
Now, the wage
rate falls to w`. If
the firm kept
producing the
same amount of
output, we would
substitute labor for
capital.
Long Run Labor Demand
K
The Effect of a Change in Wage
Rate
MC
But there is
more to the
story. What
happens to
MC?
w
w`
L*
L**
L
Long Run Labor Demand
Q*
K
The Effect of a Change in Wage
Rate
MC
It probably
moves to the
right. (Note
that this is a
fall in MC).
w
w`
L*
L**
L
Long Run Labor Demand
Q*
Q**
K
The Effect of a Change in Wage
Rate
MC
It probably
movesthe
to the
Ergo,
right.
firm(Note
that this is a
increases
fall
in MC).
output
w
w`
L*
L**
L
Long Run Labor Demand
Q*
Q**
K
The Effect of a Change in Wage
Rate
MC
It probably
movesthe
to the
Ergo,
So we have
right.
firm(Note
two effects
that this is a
increases
on labor
fall
in MC).
output
demand:
w
w`
L*
L**
L
Long Run Labor Demand
Q*
Q**
K
The Effect of a Change in Wage
Rate
MC
Substitution
It Effect
probably
movesthe
to the
Ergo,
So we have
(Lower
wages
right.
firm(Note
two effects
mean
more
that this is a
increases
on labor
demand
for
fall
in MC).
output
demand:
w workers)
w`
L*
L**
L
Long Run Labor Demand
Q*
Q**
K
The Effect of a Change in Wage
Rate
Scale Effect
MC
Substitution
(Lower wages
It Effect
probably
may mean
movesthe
to the
Ergo,
So we have
(Lower
wages
changed output
right.
firm(Note
two effects and that may
mean
more
that this is a
increases
on labor mean less
demand
for
fall
in MC).
output
demand: demand for
w workers)
workers)
w`
L*
L**
L
Long Run Labor Demand
Q*
Q**
The Two Effects
Change in Quantity of Labor
Demanded
= Substitution Effect + Scale
Effect
Long Run Labor Demand
The Two Effects
Change in Quantity of Labor
Demanded
In
general, we expect
the + Scale
= Substitution
Effect
substitution effect will
Effect
dominate even if the scale
effect is negative.
Long Run Labor Demand
End
©2006 Charles
W. Upton
Long Run Labor Demand