Demand For Labour During The Short Run

1223 WordsNov 4, 20145 Pages
DEMAND FOR LABOUR IN THE SHORT RUN The event, where a firm produces only one product (Q) using the two inputs labour (L) and capital (K), explains the general principles that determine labour demand. The technological relationship between output and any blend of inputs is given by the production function: Q = F (K, L) The quantity of capital is fixed at K = K0 in the short run. Hence, the production function is a function of labour (L), keeping K fixed. The amount of labour services is variable. Changing the number of people hired, or changing the working hours of each employee, or both, can vary the amount of labour services. However, here we assume that there is no distinction between the variations in the number of people hired and working hours. This trait of the labour demand is discussed in the Chapter 6. Also, the possibility of the labour being a “quasi-fixed factor” in the short run is discussed later. The output of the firm in the short run and the employment decisions are used to derive the demand for the labour in the short run. There are two decisions that result from the supposition of profit maximization. First, the firm will continue to operate as long as it covers its variable costs. This is because of the fact that the firm will have to pay the fixed costs, i.e. the sunk costs whose size has no effect on what the most profitable activity is at a particular time, regardless of whether the firm operates or not. The second decision says that if the firm
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