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    Labor Demand in The Long Run

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    qulb abbas
    This document discusses labor demand in the long run using an isoquant-isocost model with labor (L) and capital (K) as inputs. It defines key terms like isoquants, the marginal rate of technical substitution (MRTS), and isocost curves. The MRTS declines along an isoquant due to diminishing returns. Cost minimization occurs where an isocost curve is tangent to an isoquant, implying MRTS=w/c, where w is the wage rate and c is the capital price. A change in the wage rate causes substitution and scale effects on input demand as firms adjust the input mix while minimizing costs.

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    Labor Demand in The Long Run

    Uploaded by

    qulb abbas
    19 views16 pages
    This document discusses labor demand in the long run using an isoquant-isocost model with labor (L) and capital (K) as inputs. It defines key terms like isoquants, the marginal rate of technical substitution (MRTS), and isocost curves. The MRTS declines along an isoquant due to diminishing returns. Cost minimization occurs where an isocost curve is tangent to an isoquant, implying MRTS=w/c, where w is the wage rate and c is the capital price. A change in the wage rate causes substitution and scale effects on input demand as firms adjust the input mix while minimizing costs.

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    chapter 3a

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    This document discusses labor demand in the long run using an isoquant-isocost model with labor (L) and capital (K) as inputs. It defines key terms like isoquants, the marginal rate of technical substitution (MRTS), and isocost curves. The MRTS declines along an isoquant due to diminishing returns. Cost minimization occurs where an isocost curve is tangent to an isoquant, implying MRTS=w/c, where w is the wage rate and c is the capital price. A change in the wage rate causes substitution and scale effects on input demand as firms adjust the input mix while minimizing costs.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    19 views16 pages

    Labor Demand in The Long Run

    Uploaded by

    qulb abbas
    This document discusses labor demand in the long run using an isoquant-isocost model with labor (L) and capital (K) as inputs. It defines key terms like isoquants, the marginal rate of technical substitution (MRTS), and isocost curves. The MRTS declines along an isoquant due to diminishing returns. Cost minimization occurs where an isocost curve is tangent to an isoquant, implying MRTS=w/c, where w is the wage rate and c is the capital price. A change in the wage rate causes substitution and scale effects on input demand as firms adjust the input mix while minimizing costs.

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    Labor Demand in the Long Run

    The long run


     in the long run, all inputs are variable,
     model used in discussion has 2 inputs:
    L (labor) and K (capital).
     Q = f(L,K)
     isoquant - a graph that contains all of
    the combinations of inputs that result in
    a given level of output.
    Isoquant
    Isoquant
    Isoquants
    Marginal rate of technical substitution
    The marginal rate of technical substitution of L for K
    (MRTS) is defined as the additional amount of capital
    needed to replace a unit of labor, holding output constant.
    Mathematically, the MRTS can also be expressed as:
    Law of diminishing MRTS
     Law of diminishing
    MRTS – the MRTS
    declines as the level
    of labor use rises
    along an isoquant
    (i.e., isoquant
    curves are convex)
    Alternative derivation of the MRTS

    Along an isoquant:

    With a little manipulation:

    More precisely:

    Or:
    Isocost curves
    TC = wL + cK
    where: TC = total cost
    w = wage
    c = price of capital
    L = quantity of labor
    K = quantity of capital

    In slope-intercept form, this equation becomes:


    K = (-w/c)L +(TC/c)
    Isocost curve
    Isocost curves
    Cost minimization
    Cost-minimization rule
     cost minimization occurs when an isocost
    curve is tangent to the isoquant
     -MRTS = -w/c
     MRTS = w/c


    Substitution and scale effects
     the substitution effect associated with a
    change in the wage rate is the change in the
    mix of inputs that results from the change in
    relative prices, holding output constant.
     the scale effect is the change in the mix of
    inputs that occurs because of the change in
    the level of output resulting from a change in
    factor prices, holding relative factor prices
    constant.
    Substitution effect
    Scale effect

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