Courses · Microeconomics · Week 9

Labor Economics

Week 9 of Microeconomics, a fifteen-week course taught through Coffee Shop Clash, a live business simulation. Free to read.

Your fifth barista costs exactly as much as your second. Do they make as many lattes? Your decision form already hints at the answer: the 5th adds less than the 2nd.

Learning objectives. After this week you can (1) explain why labor demand is a derived demand; (2) compute marginal product and marginal revenue product; and (3) apply the hiring rule, MRP at least the wage.

Remember this: hire for the cups you will sell, not the cups you could make.

1) Derived demand

Nobody hires a barista for their own sake. You hire because customers want coffee and baristas turn hours into cups. Demand for labor is derived from demand for the product: when latte demand rises (exam week, a cold morning), your demand for baristas rises with it.

2) Marginal product

Marginal product (MP) is the extra output from one more worker. Behind one counter, workers share the grinder, the register and the space, so each new one adds less: diminishing marginal product. In an example shop:

BaristasCups per hourMarginal product
12020
236+16
350+14
462+12

Every row costs the same wage, and every row adds less. Your report's Econ 201 desk points this out when you staff four or more.

3) The hiring rule

MRP = extra cups actually sold × contribution margin per cup
Hire while MRP ≥ the wage

At $16 an hour, one barista on a 10-hour day costs $160. Barista #4 could make 120 more cups, but your reports suggest only 60 more would sell, at a $2.80 contribution margin: MRP = 60 × $2.80 = $168, just above $160. If only 40 would sell, MRP = $112, below the wage. Capacity earns money only when customers fill it.

4) Bottlenecks, wage floors and training

Your report's Utilization line ends with labor-bound or machine-bound. If the machine is the limit, another barista adds no cups at all. A wage floor set above the market-clearing wage creates a surplus of labor, which is unemployment; when wages rise, firms hire fewer people or hours, a movement along their labor demand curve. Training is human capital: spend now and the same crew makes more cups later.

Quick self-check

(a) Barista #5 adds 10 cups an hour, and all would sell over a 10-hour day at a $2.00 margin. MRP against the wage? (b) Your Wages line is $640 for a 10-hour day at $16 an hour. How many baristas? (Answers: $200 against $160, so MRP clears the wage; 640 ÷ 160 = 4.)

Common mistakes

  • Hiring for capacity, not sales. MRP counts cups sold.
  • Ignoring the bottleneck. A machine-bound shop gains no cups from another barista.
  • Forgetting hours. Longer days raise the wage bill for every barista on shift.

This week in the arena

Pick one Daily Report and divide Wages by Customers served: that is your labor cost per customer. Note whether the report says labor-bound or machine-bound. Then ask of your last barista: did they add cups that sold, or cups nobody ordered?

In the course, the reading is where the week starts

Students who take Microeconomics on Extrapoli run a business in Coffee Shop Clash all term. Each week pairs this reading with a quiz and a two-part assignment worked from the numbers their own team produced in the simulation, with each team's figures set beside their work for the instructor to grade.