wage - price of labor; vertical axis hours of work - quantity of work; horizontal axis use opportunity cost, marginal principle, interdependence principle, & cost benefit to explain stylists labor of supply and wages - opportunity cost: if wage is too low, person might take another job as skin specialist because they do not think their time is worth giving to styling marginal principle: if the wage is higher, existing hair stylists may work more hours (& thus, balancing things at the margin) interdependence: the higher the wage, the more people will want to work in a hair salon rather than other retail establishments cost-benefit: higher wages for hair stylists means that a person is much more likely to seek out hair stylists' work, either giving up time in the day or forgoing other work opportunities use opportunity cost, marginal principle, interdependence principle, & cost benefit to explain stylists labor of demand and wages - opportunity cost: if wage is too high, they'll hire few stylists which means they'll sell fewer haircuts cost-benefit: if wage is too low, they might also find it profitable to remain open for longer hours (opening earlier, staying open on weekends) marginal: quantity of hours demanded in market for hair stylists is typically higher when wage is lower (managers calculate exactly how much by this principle) interdependence: all these calculations will also be affected by changes in the cost of other inputs in the hair salon business, like rent for the salon labor demand - how employers decide how many workers to hire how to buy the time and effort of the workers they hire in a perfectly competitive market, savvy employers pay... - the market wage no reason to pay more if they get good people no reason to pay less because good workers will then go to other firms what decisions do need to be made in a perfectly competitive market? - how many workers to hire (since there is no issue of finding workers) turn to marginal principle to break this decision down turn to cost benefit to know when to hire until (until that extra worker yields marginal benefits greater than the marginal costs incurred) turn to opportunity cost to lay out other options you could spend that extra wage towards turn to interdependence to remind us to pay attention to outcomes in other markets in order to make best hiring decisions marginal product of labor - the extra production that occurs from hiring an extra worker **most businesses experience diminishing marginal product: at some point, hiring additional workers yields smaller and smaller increases in output marginal revenue product - measures marginal revenue from hiring an additional worker MRP = (marginal product of labor) x (price of that product) rational rule for employers - hire more workers if marginal revenue product is greater than (or equal to) the price keep applying this rule until wage = MRP a firm's labor demand curve is the same as ... - the firm's marginal revenue product curve derived demand - the demand for an input derives from the demand for the stuff that input produces the market labor demand curve shifts due to ... - - changes in demand for your product (if demand increases, then MRP, wages increase and curve shifts right) - changes in the price of capital (depends on effects and skilled workers) - better management techniques and productivity gains (want to hire more workers if each worker can now produce more - increases demand) scale effect - when price of capital goods (or any of your inputs) declines, your business can produce output more cheaply, so at any given price, you will sell a larger quantity (or produce at a larger scale which will require more workers and for you to increase labor demand) * if this dominates, then decrease in price of capital will lead to rightward shift of labor demand curve substitution effect - many tasks that can be done by either workers or machines and so when price of these machines fails, the demand for labor can be substituted for machines decreases * if this dominates, then decrease in price of capital will lead to leftward shift of labor demand curve in markets for low skill workers, where machinery can most readily substitute for tasks they perform, a decline in price of capital tends to lead to .... - decrease in demand for their labor high skill workers are more likely to be complements to capital equipment in markets for high skill workers, a decline in price of capital tends to lead to ... - increase in demand for labor technological change - modern computers made the typing pool obsolete in short run, harder for businesses to adapt since they cannot make plans immediately in long run, businesses have more flexibility to make changes to equipment (can apply for loans, etc...) - studies show that long run higher min wages encourage businesses to innovate labor saving technology and management practices technology impact on labor - will end some jobs, will create others new jobs in those manufacturing, servicing, etc... the robots thus, demand for low skill workers will decrease and demand for high skill workers will increase robots will also increase productivity and drive price of product down, which means that there's more $$ for people to spend on other things and this increased demand for stuff will lead to other new jobs labor supply - the time you spend working in market 3 key decisions that correspond to labor supply: - how many hours should you work each week? when should you work in the labor market, versus pursuing other alternatives (education, home production, retiring)?