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| | For a competitive firm, in contrast, MFC=W because it can hire all the workers it needs at the market wage, without causing the market wage to rise for all its workers. | | For a competitive firm, in contrast, MFC=W because it can hire all the workers it needs at the market wage, without causing the market wage to rise for all its workers. |
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| − | ==(For Intermediate and Honors Only) Elasticity of Derived Demand for Inputs==
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| − | Just as we had price elasticity of demand for buying goods, we can also look at the elasticity of demand for inputs such as labor. The definition is what you might expect:
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| − | :Elasticity of input demand = (Percent change in quantity of input demanded)
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| − | ::::divided by (percent change of input’s price)
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| − | Both changes are typically stated in positive numbers, as in the example of price elasticity of demand.
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| − | Exam questions often ask about the firm’s demand for the input of labor. If wages increase by 10% and the demand for labor falls by only 5%, then the elasticity of labor demand is 0.5. Because it is less than one, this is an inelastic demand for labor.
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| − | If, on the other hand, when wages increase by 10% then the demand for labor falls by $20%, then the elasticity of labor demand is 2 and this is greater than one. This is an elastic demand.
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| − | When the labor demand is elastic, then wage and the overall payments as wages move in the opposite direction. In other words, when the wage increases, the overall wage expense to companies decreases. That is because an increase in wage causes a greater decrease in demand for labor, and overall wage payments decrease.
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| − | But when the labor demand is inelastic, then wage and the overall payments as wages move in the same direction. That is because an increase in wage does not decrease the labor demand by companies much, and thus their overall labor costs increase also.
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| − | Assembly line workers at car manufacturing plants typically have inelastic labor demand. As labor unions were successful in increasing the wages of assembly line workers in the early 1970s, car manufacturers’ overall labor costs increased dramatically. Only competition by foreign manufacturers was successful in stopping the upward climb in car prices due to increasing labor costs.
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| | ==(Honors Only) Example== | | ==(Honors Only) Example== |