Factor Markets ‹ 145
b. Output effect (OE). Lower machine prices lower production costs (a down-
ward shift in MC), which increases output for the firm and prompts an
increased demand for labor. With the lower marginal cost of producing lemon-
ade, Molly sees that she can actually produce more and would therefore need
more labor.
c. The net effect of a lower price of capital depends upon the magnitude of each
effect. If the SE >OE, demand for labor falls. If the OE >SE, the demand for
labor increases.
- Complementary resources. When labor and machine work together, a lower price of the
machine makes it more affordable to purchase more machinery but also increases the
demand for labor. Interstate trucking companies need trucks, fuel, and drivers. When
the price of fuel increases, this can have a negative impact on the demand for drivers.
For Molly’s firm, if the price of lemons falls, this more affordable complement to labor
might increase the demand for labor.
Table 10.3 is a summary of the determinants of labor demand.
Table 10.3
LABOR DEMAND INCREASES IF... LABOR DEMAND DECREASES IF...
Demand for the product increases, Demand for the product decreases, decreasing
increasing the price. the price.
The labor becomes more productive, The labor becomes less productive, either
either with more resources available, with fewer resources available, lessened
better technology, or a higher technology, or a lower quality workforce.
quality workforce.
The price of a substitute resource The price of a substitute resource falls and the
falls and the OE >SE. SE >OE.
The price of a substitute resource The price of a substitute resource rises and
rises and the SE >OE. the OE >SE.
The price of a complementary The price of a complementary resource rises.
resource falls.
10.2 Least-Cost Hiring of Multiple Inputs
Main Topic: The Least-Cost Hiring Rule
Finding the best way to cope with scarcity really excites economists. We found that con-
sumers needed to find the best (utility maximizing) combination of two goods, given the
prices and an income constraint. For producers, we would like to find the best (cost mini-
mizing) combination of two inputs, given the prices and production constraint. To do this,
we use the consumer’s decision as a model for the producer’s decision. The consumer’s util-
ity maximizing rule said to find the combination of good X and good Y so that MUx/Px=
MUy/Pywhile spending exactly his or her income and paying prices Pxand Py.
Least-Cost Hiring Rule
For a producer, we can express the constraint in two equivalent ways. Remember the bridge
between production and cost?
- You must produce Q* units of output. Now find the least-cost ($TC) way of doing so.
KEY IDEA
