13) Demand For Labour

Question 1

Define labour

Answer 1

a factor of production comprising the effort of workers to create goods and services

Question 2

define sub-market

Answer 2

part of the market with unique characteristics

Question 3

define derived demand

Answer 3

where the demand for a factor of production or good derives not from the factor or good itself, but from the goods or services that it provides

Question 4

define marginal physical product of labour (MPP(L))

Answer 4

the additional quantity of output produced by an additional unit of labour input, keeping capital input fixed

Question 5

define marginal revenue product of labour (MRP(L))

Answer 5

the additional revenue received by a firm as it increases output by using an additional unit of labour input, i.e. the marginal physical product of labour multiplied by the marginal revenue received by the firm

Question 6

MRP (L) equation

Answer 6

MRP(L)= MPP(L) X MR

Question 7

marginal revenue product theory

Answer 7

a theory which argues that the demand for labour depends upon balancing the revenue that a firm gains from employing an additional unit of labour against the marginal cost of that unit of labour

Question 8

define wage elasticity of demand for labour

Answer 8

a measure of the sensitivity of quantity of labour demanded to a change in the price of wages.

Question 9

WED equation

Answer 9

% change in Q of Labour Demanded / % change in wages

Question 10

define labour productivity

Answer 10

a measure of output per hour worked

Question 11

define unit labour cost

Answer 11

the average cost of labour per unit of output

Question 12

why is labour demanded?

Answer 12

Labour is demanded by government and firms for what labour produces, not for the labour itself; all demand for labour is derived demand

Question 13

what factors effect the demand for labour?

Answer 13

price of labour (wage rate)

Question 14

shifts in the demand for labour PDPC

Answer 14

1) Change in productivity of workers, changing their desirability as a substitute for capital
2) Change in demand for the products workers produce
3) Change in the price of the good workers produce
4) Change in the cost of capital
5) Change in an employment subsidy

Question 15

Factors affecting wage elasticity of demand for labour (SECT)

Answer 15

1) Substitutability - the extent to which labour can be substituted by capital (machines)

2) Elasticity - the more price elastic demand for the product, the more elastic the demand for labour because wage costs are passed on to the consumer by increased prices

3) Proportion of total costs - if wages area small proportion of a firm’s total cots then demand for labour is more inelastic

4) Time - demand for labour is more elastic in the long run as new workers can be trained, but in the short run demand for labour is more inelastic

Question 16

what is MRP summarised

Answer 16

It is the extra value of the extra
products produced by the extra worker

Question 17

what does a profit maximising firm choose for labour input?

Answer 17

such that the marginal cost of labour is equal to the marginal revenue product of labour (MC, = MRPL)

Question 18

why is the demand curve for labour downward sloping?

Answer 18

Due to diminishing marginal returns from each extra unit of labour (worker) employed, the firm has a downward sloping demand curve for labour, formed by the marginal revenue product curve

Question 19

what does the position of the firm’s labour demand curve depend on?

Answer 19

The position of the firm’s labour demand curve depends on factors that affect the price of the firm’s product and influence the marginal physical product such as:
• Technology
• Efficiency

Question 20

why is MC(L) horizontal?

Answer 20

In a perfectly competitive market a firm cannot influence the market wage, and can get as much labour as required at the market rate, so MC, is horizontal.

Question 21

what are the main influences of labour productivity?

Answer 21

The main influences on labour productivity are:
• Skills and training of workforce
• Availability of complementary factor inputs (capital and technology)
• Organisation of production process (e.g. division of labour)

Question 22

why is productivity important?

Answer 22

Productivity affects a firm’s ability to compete domestically and internationally