U09071

Stanley Fong
Lecture 5: 12 July 2006
Lecture
Lecture 5:
5: Labour
Labour Demand
Demand
The production function
The short-run demand for labor
The demand for labour in the long run
The
The production
production function
function

The labour performance in the production

process
Q = f (K,L)
Q: output
K: capital
L: labour input
The
The short-run
short-run demand
demand for
for labor
labor (1)
(1)

Total physical productivity of labour (TPPL)

Average physical productivity of labour (APPL)
Marginal physical productivity of labour (MPPL)

APPL = TPPL / L
MPPL = δ TPPL / δL
The
The short-run
short-run demand
demand for
for labor
labor (2)
(2)
Capital

TPPL
Q2
Output

Q1

0 L1 L2
Labour
The
The short-run
short-run demand
demand for
for labor
labor (3)
(3)

Law of diminishing returns

As the amount of labor employed
increases, each change in labor produces a
smaller change in output.
The
The short-run
short-run demand
demand for
for labor
labor (4)
(4)
The Relationship between marginal and average
physical productivity of Labor
Output Q

APPL
MPPL
Labour L
The
The short-run
short-run demand
demand for
for labor
labor (5)
(5)

Marginal revenue product = MPPL x MRx

MRx: marginal revenue from selling
output Q

As MRx = Px, MRPL = MPPL x Px

Px: price

TFOL : firm’s total outlay on labour

The
The short-run
short-run demand
demand for
for labor
labor (6)
(6)

$
TPPL

Max TFOL
profits

0 L0 Labour
The
The Demand
Demand forfor Labour
Labour in
in the
the
Long
Long Run
Run (1)
(1)
The budget constraint determines how
much labour (L) and how much capital (K)
a firm can purchase with its current budget:
B= WxL+RxK
B: the budget level
W: cost of labour
R: cost of capital
The
The Demand
Demand forfor Labour
Labour in
in the
the
Long
Long Run
Run (2)
(2)
The cost minimizing amount of capital and
labor for a given output
Capital

Ko
Isoquant

. A

Qx

Isocost
Labour
Lo
The
The Demand
Demand forfor Labour
Labour in
in the
the
Long
Long Run
Run (3)
(3)
Spending budget on labour or capital
Ko = B/r; Lo=B/w
Budget control = Ko/Lo =(B/r)/(B/w) =w/r
(i.e., the ratio of the prices of labor and
capital)
The
The Demand
Demand forfor Labour
Labour in
in the
the
Long
Long Run
Run (4)
(4)
Qx = f (K,L)
W = λ(δQx) / (δL)
R = λ (δQx) / (δK)
λ= R / (δQx) / (dK) = W / (δQx)/ (dL)
W: cost of labour
R: cost of capital
λ: marginal cost
The
The Demand
Demand forfor Labour
Labour in
in the
the
Long
Long Run
Run (5)
(5)
The slope of kl is equal to the ratio of
factor prices W/R.
Cost minimisation for a given level of
output Qx is achieved at point A where
the isoquant curve is tangential to the
isocost line.
Optimal amount of labor and the right
amount of capital
Thank you