Labor Demand Lecture 3 PDF

Labor Demand Dr. Christopher D. Balubayan Professor University of Southeastern Philippines College of Applied Economics 1st Semester SY 2024-2025 i. Derived Demand for Labor Definition: Demand for labor comes from the demand for goods and services that...

Labor Demand Dr. Christopher D. Balubayan Professor University of Southeastern Philippines College of Applied Economics 1st Semester SY 2024-2025 i. Derived Demand for Labor Definition: Demand for labor comes from the demand for goods and services that labor helps produce. Example: A popular café sees a rise in customers wanting coffee. To keep up, they hire two additional baristas. The demand for baristas comes from the increased demand for coffee. ii. Short-Run Production Function Definition: Shows how many goods can be produced with a fixed amount of capital and varying labor input. Example: A local ice cream shop has one ice cream machine (fixed). During summer, they hire more staff to serve customers quickly. However, after a certain point, adding more staff leads to crowding, and production doesn't increase significantly. iii. Short-Run Demand for Labor Definition: The number of workers a firm needs in the short run to produce a certain level of output. Example: A landscaping company gets a surge of requests for yard work in spring. To manage the workload, they temporarily hire extra workers for a few months. iv. Long-Run Demand for Labor Definition: Demand for labor when all inputs can be varied, allowing for adjustments in production methods. Example: A textile factory plans to modernize its equipment. As a result, they assess the need for new skilled workers to operate advanced machines, leading to a permanent increase in their workforce. v. Market Demand for Labor Definition: The total demand for labor across all firms in a market. Example: In a growing city, multiple construction companies are competing for skilled laborers. As projects increase, the overall demand for construction workers rises, prompting wages to go up. vi. Elasticity of Labor Demand Definition: Measures how responsive the quantity of labor demanded is to changes in wages. Example: A fast-food chain raises wages by 15% to attract workers. If they notice a 10% decrease in the number of hours worked due to budget constraints, this shows a relatively elastic demand for labor. vii. Determinants of Labor Demand Factors Influencing Demand:  Product Demand: Increased demand for electric cars leads manufacturers to hire more engineers and assembly workers.  Technology Changes: A software company introduces automation, requiring fewer entry-level programmers but more skilled data analysts.  Cost of Capital: A delivery service finds it cheaper to buy new delivery vans, reducing their need for drivers as they can now rely on automated logistics. viii. Isoquant-Isocost Isoquants: Curves showing combinations of labor and capital that produce the same output. Isocost Lines: Lines representing all combinations of labor and capital that can be purchased for a given cost. Isoquant Example Situation: A small bakery wants to produce 100 loaves of bread per day. Isoquant Explanation: The bakery uses an isoquant to determine the various combinations of labor (bakers) and capital (ovens) that can produce the same output of 100 loaves. Example: If the bakery has 2 bakers and 1 oven, they can produce 100 loaves. Alternatively, they could also achieve this with 4 bakers and 0.5 ovens (meaning they would need to share or use a more efficient oven). This analysis shows the trade-offs between hiring more bakers or using a different number of ovens, keeping the output constant at 100 loaves. Isocost Example Situation: The same bakery has a budget of $500 to spend on labor and capital. Isocost Explanation: The isocost line represents all the combinations of labor and capital that can be purchased for this budget. The cost of labor (baker's wage) is $50 per baker per day, and the cost of one oven is $200. Example: With $500, the bakery could hire 10 bakers (10 x $50) and have no ovens left in the budget. Alternatively, they could buy 2 ovens (2 x $200 = $400) and hire 2 bakers (2 x $50 = $100), using the entire budget. The isocost line helps the bakery visualize the combinations of labor and capital they can afford while staying within their budget constraints. Combining Isoquant and Isocost Final Analysis: The bakery can graph both the isoquant (showing the combinations to produce 100 loaves) and the isocost (showing affordable combinations given their budget) on the same graph. The point where the isoquant touches the isocost line represents the most efficient combination of bakers and ovens they can afford to maximize production without exceeding their budget. Conclusion Conclusion Summary: Understanding labor demand helps businesses make informed hiring decisions based on market conditions and production needs. Key Takeaway: Demand for labor is closely tied to the demand for products and can be influenced by various economic factors. 14