Hello again tom123!
First of all, we have to understand how the demand for labour curve of
a firm is formed. We will see that this curve slopes downwards on
*any* firm that has a decreasing labour productivity technology, not
just the ones that face an imperfect competition market.
The marginal productivity of labour (I'll call it from now on marginal
product of labour or MPL) is how much total output increases when an
extra worker is hired. Usually we will have that, ceteris paribus (all
other things remaining equal), if we keep adding workers, each will
produce less than the previous one; that is, we will have a decreasing
marginal product of labour. This is also called the Law of Diminishing
Marginal Returns.
AmosWEB GLOSS*arama
http://www.amosweb.com/cgi-bin/gls_src.pl?fcd=dsp&key=law+of+diminishing+marginal+returns
"The behaviour of marginal product is linked directly to the
productivity of each additional worker. At low levels of employment
the fixed factors of production, land and capital are under-utilised.
This means that each additional worker will be have plenty of capital
to use and, as a result, marginal product will rise. However, beyond a
certain point the fixed factors of production become scarcer and new
workers will not have much capital to work with. Indeed, eventually
the workers will start to get in each other's way. As a result, the
productivity of each additional worker falls. As the labour input
increases, so the capital per worker ratio declines and this can
negatively affect overall productivity"
Tutor2u - Production in the short-run
http://www.tutor2u.net/economics/content/topics/buseconomics/short_run.htm
An example of MPL curve would be
Wokers Marginal Product
1 10
2 8
3 6
4 5
This is a case of always decreasing MPL. The first worker produces 10
units, the second one produces 8. So, total production when 2 workers
are hired is 18.
Now, what does this has to do with the slope of the demand for labour
curve? We now turn our attention to how this curve is formed given the
MPL. For simplicity, let's assume that MPL is *always* decreasing
instead of first increasing and then increasing. It will do no harm to
use this assumption, since, in any case, firms will choose a number o
workers such that the MPL is decreasing; because, if it were still in
the increasing "section" of the MPL curve, it would want to hire more
workers (since new workers will be more productive than the previous
ones), until eventually it will come to have decreasing MPL. So, we'll
use the above example of an MPL curve.
We also have to define the "value of the marginal product of labour"
(VMPL). This is the production each worker adds multiplied by the
price of the good. In the above example, if the price of the good is
$10, then the VMPL of the first worker is $100, the VMPL of the second
one is $80 and so on.
If the firm is small relative to the market, it will have to take the
wage level as given from the market. So, now we're ready to derive the
demand for labour curve using a "marginal analysis". The demand for
labour curve is a relationship between the wage the firm has to pay to
its workers and the number of worker it hires. What happens when the
wage is $90? How many workers will the firm want to hire? Well, the
first worker will add 10 units of production, valued at $100. So, he
or she produces $100 and costs $90 to hire, thus the firm will hire
this worker. What about the second one? The second worker produces $80
and costs $90 to hire, thus the firm will not hire this worker. At a
wage of $90, the firm will demand 1 worker. What if the wage is $75.
Using the same analysis, it's easy that firm will want to hire the
first and second workers, but not the third one. Thus, at wage=$75,
the demand for labour is 2 workers. It's clear now that the lower the
wage, the more workers the firm will want to hire. So, this explains
why the demand for labour is downward sloping: more wage means less
workers, and viceversa.
For more information on this subject, particularly, how is demand of
labour formed if the firm is the ONLY firm in a labour market, please
see
Principles of Microeconomics, 1st Canadian Edition
http://highered.mcgraw-hill.com/sites/0070889740/student_view0/chapter13/cyberlecture.html
Finally, how is the elasticity of this curve determined? Knowing that
the demand for labour comes from the MPL, which in turn depends on the
technology the firm uses, the answer to this question is easy: the
elasticity of the demand for labour curve depends on the technology.
If the technology is such the the MPL falls rapidly when the number of
workers increase, then the elasticity of the the demand for labour
curve will be high, and if the marginal product of labour decreases
slowly, the elasticity of the demand for labour will be low.
For a formal derivation of the demand for labour curve, go to
The Simple Model for Labour Demand
http://www2.rhul.ac.uk/~uhte020/lecture%201%20labour%20-%20overheads.pdf
Hope this helps!
Best regards,
elmarto |
