13) Demand For Labour Flashcards
Define labour
a factor of production comprising the effort of workers to create goods and services
define sub-market
part of the market with unique characteristics
define derived demand
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
define marginal physical product of labour (MPP(L))
the additional quantity of output produced by an additional unit of labour input, keeping capital input fixed
define marginal revenue product of labour (MRP(L))
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
MRP (L) equation
MRP(L)= MPP(L) X MR
marginal revenue product theory
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
define wage elasticity of demand for labour
a measure of the sensitivity of quantity of labour demanded to a change in the price of wages.
WED equation
% change in Q of Labour Demanded / % change in wages
define labour productivity
a measure of output per hour worked
define unit labour cost
the average cost of labour per unit of output
why is labour demanded?
Labour is demanded by government and firms for what labour produces, not for the labour itself; all demand for labour is derived demand
what factors effect the demand for labour?
price of labour (wage rate)
shifts in the demand for labour PDPC
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
Factors affecting wage elasticity of demand for labour (SECT)
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
what is MRP summarised
It is the extra value of the extra
products produced by the extra worker
what does a profit maximising firm choose for labour input?
such that the marginal cost of labour is equal to the marginal revenue product of labour (MC, = MRPL)
why is the demand curve for labour downward sloping?
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
what does the position of the firm’s labour demand curve depend on?
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
why is MC(L) horizontal?
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.
what are the main influences of labour productivity?
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)
why is productivity important?
Productivity affects a firm’s ability to compete domestically and internationally
