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Video transcript

what we're going to do in this video is dig a little bit deeper into labor markets and where it's really not going to be any fundamentally new concepts we're really just going to reapply concepts that we've already seen before and maybe use slightly different words but the reason why labor is interesting is labor is one of the factors of production it's one of the inputs you need for firms to produce whatever they do produce and unlike most in most markets if we're talking about the computer markets let me write over here in the computer market in the computer market the demand the demand is coming from individuals so it's coming from I'll just call it individual people while the supply is coming from firms is coming from firms in the labor market it's the other way around in the labor market the demand is coming from firms these are the people who need labor who are hiring the labor so this is coming from firms and the supply is coming from individual people so it's coming from individual individual people and what's interesting about that is because the demand is coming from firms in the past we went when the supply was coming from firms we could look at a firm's cost structure and we could come up with a supply curve from that now that the demand is coming from firms we could look at a firm's essentially their revenue structure how much incremental revenue do they get per extra employee and we can actually generate a demand curve their marginal benefit curve by looking at their business a little bit closer and that's essentially what we're going to be doing in this video and these aren't any fundamentally new ideas we're just applying them in a slightly different way and we'll use slightly different words now let's assume for the sake of this video that I run a car wash a car wash and it is a competitive car wash it is a competitive car wash I have to be a price taker I do not have a monopoly or oligopoly I'm not even a monopolistic competitor there are many car washes in the city we are undifferentiated we are all offering the same surface and so I'm going to be a price taker and let's say the equilibrium price and this market for competitive car washes is five dollars per car wash five dollars per car wash and just as a little bit of review that it also means remember I this is a competitive firm not a monopoly that my marginal revenue is equal to a constant five dollars per car wash if I do one car wash I'll get five dollars to car washes ten dollars three car washes fifteen dollars in the monopoly the marginal revenue would change so let's think about how how much benefit I would get from each incremental employee so first I will do a so let's make this column right over here let's take this L for labor so this is going to be the quantity of labor and I'm going to think what I hire what zero people one two three four or five people and then let's say and let's think about how much that we can produce when I hire these amounts of people so I'll call that I'll call that total product or we could call that total product of labor it's essentially saying what how many cars can I wash this is going to be car washes per hour so cars cars washed washed per hour how many cars can I wash per hour with a different number of people here well if I have zero people I'm going to wash the zero cars let's say I find if I have one person that that person can wash five cars per hour by him or herself two people can wash nine cars together three people can do twelve cars four people can do 14 and five people can do fifteen 15 cars together and we can plot this let's lecture you plot this on a graph just to see what's going on it always helps to visualize things so let me so that is going to be our total product that is going to be our total product and this is going to be our quantity of labor and the quantity of labor we can have one two three four or five people this is actually zero people right over here and my total product goes all the way up to fifteen so let's say that this is fifteen this would be ten and this would be five 5 10 and 15 and so we can plot these points right over here what is the total product well this is zero zero zero people I'm not watching any cars per our total product is in cars wash per hour if I if I have one person one person I can wash five cars per hour if I have two people I can wash nine cars per hour two people I can wash nine cars per hour three people I can wash twelve cars per hour three people I can wash twelve cars it's about right there four people I can wash 14 cars per hour four people 14s right about there and then finally I will do this in well the see I'm already using a lot of my colors listen pink five people I can wash 15 cars per hour five people I can wash 15 cars per hour and so total product as a function of quantity of Labor will look like a curve that looks something like this I could just connect the dots or I could make it look a little bit more curvy so it's going to look something it's going to look something like that and so one way that we should think about it in as you'll see in economics when you always want to think about how much you want to produce or how much you want to hire you always want to think about how much benefit are you getting for that incremental thing when you're when you're thinking about your cost structure how much cost for that incremental unit when you think about when you're thinking about your benefits or your demand you're saying how much benefit am I getting from that incremental unit so let's view this as the marginal let's write marginal product MP sometimes in some economics textbooks I've seen this referred to as MPL marginal product of labor actually I'll just write the L there to make it clear this is the marginal product of labor so when we go from zero people to one person on average between those two points over there we're able to our Delta R change Delta is just the Greek letter that symbolizes change our change in total product is five and so we can view that as the average the average marginal product or you can kind of say that is the marginal project halfway between these or you could view that as the marginal average marginal product between those two points right over there that's why I wrote it in a row that is in between these two points it's taking us from zero to one and actually let me plot these while I draw them while I calculate what they are so I'll draw this one a little bit more a little bit more flat so I have space which I could scroll down a little bit so in this axis I'm going to do marginal product of labor and then on this axis I'm going to have the quantity of labor so this is 1 this is 2 this is 3 4 people and 5 people so this point right over here this point right over here that's the marginal product of labor halfway you could view this as the slope halfway between 0 and 1 or you could view this as the average slope from 0 to 1 so I'll plot it right over here I'll view it and actually I label these axes so this is let's call this 5 4 3 2 1 so halfway between 0 and 1 my marginal product of labor is 5 right over there then halfway between 1 and 2 my marginal product of labor I go from 5 cars washed per hour to 9 so my marginal product of labor is 4 so between 1 & 2 my marginal product of labor is 4 and then between 2 & 3 between 2 & 3 my marginal product labor I go from 9 car washes cars washed per hour to 12 so I have 3 incremental cars washed by adding that third person so the average you could view it as the slope right over there is going to be 3 so the slope right over there is going to be 3 I didn't make this completely to scale and then these are a little bit but more bunched up down here but let's just keep going then from going from 3 to 4 the marginal product of labor I will go from 12 cars washed brook to 14 so I get two extra cars washed by adding that fourth person so between 3 & 4 I get an incremental on average to two cars for that extra person and then finally between 4 & 5 I get one extra car so between 4 & 5 I get exactly one extra car and so I'm going to get and it looks like a little bit like a curve here because I bunched up the measurements but this really should be a line this really should be this really should be a line I mean I mean well that's my best I don't want to have to reap lot all the points but this should be a line like that every time we went every time we moved up one we went down we went down one every time we moved up one we moved down one we see that over here when we went we went to five four three two one so this is five four three two one so this really should be a straight line so this is essentially plotting the slope of this curve at any point now what we can think about is because this is this by itself this is telling us the marginal benefit in terms of cars washed but this doesn't tell us the marginal benefit in terms of dollars and to do that we need the marginal product revenue or you could call it the value of the marginal product of labor and so let me write that over here so we could call this the NPR NPR for marginal product revenue or we could view that as the value of the marginal product of labor but essentially we're just saying okay if we're watching five extra cars from that first person and I'm going to get five dollars per car wash I have a I have a constant marginal revenue I am a price taker then I'm going to make twenty five dollars on those incremental five cars and if I wash four more cars I'm going to four times five I'm going to make twenty extra dollars if I wash three extra cars I'm going to make fifteen extra dollars two extra cars ten extra dollars I'm just multiplying by five every time this is times five times five times five times five and I wash one extra car times five dollars per car I'm going to make five extra dollars and so essentially we could take every point on this curve and we could multiply it by five to get our marginal product of revenue or marginal product revenue to be careful where I say the of let me plot that and I'll try to plot that a little bit neater so it's clear that this is a line so let me that's my marginal product revenue you could also view that as the marginal benefit calculated in terms of dollars you could view this as a marginal benefit in terms of cars washed this is the marginal benefit in terms of dollars and right over here we're gonna have the quantity of labor so one two three actually I want them to line up a little bit better so one is right over there two is right over there three is there four is there five is there one two three four five I'm just cool down a little bit this is my quantity of labour and the marginal product revenue goes up to twenty five so let's say this is five 10 15 20 and 25 and so is halfway between zero and one person so this is 25 right over here I am producing 25 dollars or I get an incremental revenue of 25 dollars half way on average you can view this point right over here multiply it by five I'm getting to 25 dollars on average for that incremental person then when we go to this point right over here we're getting 20 dollars we're getting 20 dollars that's this right over there then when we go to this point in orange if we multiply it times 5 we get 15 dollars so this is 5 10 15 so that's halfway between 2 and 3 our marginal product revenue is $15 so that is make it clear this is 15 right over there and then halfway between 3 and 4 people it's $10 halfway between 3 & 4 it is $10 so it's going to look something like this and then halfway between finally between 4 & 5 it is $5 it is $5 and so we're just picking points along here we pick kind of the midpoint the slope at those points or the average slope between 0 & 1 but this is if you assume this curve has a continuous slope that the slope changes continuously then this will be a line and then this will be a line as well so our line would look something like that and what's neat about this line is essentially this is the marginal benefit curve marginal benefit curve for this firm as it as it gets more and more labor so it's essentially the demand curve for this firm and if you wanted to find the demand curve for the market you could just take the demand curve for each of these competitive firms and then you would just add them all together
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