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Changes in the Number of Firms

24 April, 2015 - 15:49

We can determine the demand curve for any factor by adding the demand for that factor by each of the firms using it. If more firms employ the factor, the demand curve shifts to the right. A reduction in the number of firms shifts the demand curve to the left. For example, if the number of restaurants in an area increases, the demand for waiters and waitresses in the area goes up. We expect to see local wages for these workers rise as a result.

KEY TAKEAWAYS

  • In using the model of demand and supply to examine labor markets, we assume in this chapter that perfect competition exists—that all workers and employers are price takers.
  • A firm’s demand curve for a factor is the downward-sloping portion of the marginal revenue product curve of the factor.
  • The market demand for labor is found by adding the demand curves for labor of individual firms.
  • The market demand for labor will change as a result of a change in the use of a complementary input or a substitute input, a change in technology, a change in the price of the good produced by labor, or a change in the number of firms that employ the labor.

TRY IT!

How would each of the following affect the demand for labor by the accounting advice service, TeleTax, described in this chapter?

  • A reduction in the market price for a tax advice call
  • An increase in the market fee for the accountants that TeleTax hires
  • An increase in the marginal product of each accountant due to an expansion of the facility for screening and routing calls and an increase in the number of reference materials available to the accountants

Case in Point: Computer Technology Increases the Demand for Some Workers and Reduces the Demand for Others

“…[M]oving an object, performing a calculation, communicating a piece of information or resolving a discrepancy…[W]hich of these tasks can be performed by a computer?” ask economists David H. Autor, Frank Levy,and Richard J. Murname. In general, computers are good at performing routine tasks and substitute for labor that had performed such tasks in the past. Conversely, computers are complements for workers performing nonroutine tasks, i.e., tasks that require such attributes as creativity, flexibility, and problem-solving. As the price of computers has fallen in recent decades, the demand for labor performing nonroutine tasks, usually college-educated workers, has grown, while the demand for labor performing routine tasks has fallen. The table below illustrates how computerization likely affects demand for different kinds of labor.

Predictions of Task Model for the Impact of Computerization on Four Categories of Workplace Tasks

 

Routine Tasks

Nonroutine Tasks  Analytic and Interactive Tasks

Examples

  • Record-keeping
  • Calculation
  • Repetitive customer service (e.g. bank teller)
  • Forming/testing hypotheses
  • Medical diagnosis
  • Legal writing
  • Managing others

Computer Impact

Substantial  substitution

  • Strong complementarities
   
  • Manual Tasks

Examples

  • Pinking or sorting
  • Repetitive assembly
  • Janitorial services
  • Truck driving

Computer Impact

  • Substantial substitution
  • Limited opportunities for substitution or complementarity
 

In studying the impact of computerization on labor demand, the study’s authors have also noted that changes in the nature of certain tasks (“task-shifting”) stemming from computerization have markedly changed what an occupation encompasses. For example, the Department of Labor’s Occupation Outlook Handbook in 1976 described what secretaries do as: “Secretaries relieve their employers of routine duties so they can work on more important matters. Although most secretaries type, take shorthand, and deal with callers, the time spent on these duties varies in different types of organizations.” In contrast, the 2000 edition of the Handbook describes the work of secretaries quite differently: “As technology continues to expand in offices across the Nation, the role of the secretary has greatly evolved. Office automation and organizational restructuring have led secretaries to assume a wide range of new responsibilities once reserved for managerial and professional staff. Many secretaries now provide training and orientation to new staff, conduct research on the Internet, and learn to operate new office technologies.” The authors find that this task-shifting within occupations, away from routine tasks and towards nonroutine tasks, is pervasive.

Source: David H. Autor, Frank Levy, and Richard J. Murname, “The Skill Content of Recent Technological Change: An Empirical Exploration,” Quarterly Journal of Economics, 118: 4 (November 2003): 1279–1333.

ANSWERS TO TRY IT! PROBLEMS

  • A reduction in market price would decrease the marginal revenue product of labor. Since the demand for labor is the downward-sloping portion of the marginal revenue product curve, the demand for labor by TeleTax would shift to the left.
  • An increase in the market fee that TeleTax pays the accountants it hires corresponds to an increase in marginal factor cost. TeleTax’s demand curve would not shift; rather TeleTax would move up along its same demand curve for accountants. As a result, TeleTax would hire fewer accountants.
  • An increase in the marginal product of each accountant corresponds to a rightward shift in the marginal revenue product curve and hence a rightward shift in TeleTax’s demand curve for accountants.