3.1. Demand for Labour

Question 1

Derived Demand

Answer 1

the demand for labour (e.g. doctor) comes from the demand for the good or service it produces (e.g. healthcare)

Question 2

Demand for Labour

Answer 2

the quantity of labour a firm is willing and able to hire at a given wage rate

Question 3

Total Physical Product

Answer 3

the total output produced from a given quantity of labour. Similar to Total Product (TP).

Question 4

Marginal Physical Product (MPP)

Answer 4

the additional output produced from hiring an additional unit of labour.
- MPP = ΔTPP / ΔL

Question 5

Marginal Revenue Product (MRP)

Answer 5

the additional revenue received from employing an extra worker.

• MRP = MR x MPP
• MRP = ΔTR / ΔL

Question 6

Marginal revenue product (MRP) theory

Answer 6

The wages paid and the quantity of labour employed is based on the marginal revenue product (MRP) of labour

Question 7

Marginal revenue product (MRP) theory assumptions

Answer 7

1) Short-run (labour = variable FOP, Capital = fixed FOP), therefore diminishing returns occur.
2) Workers are homogeneous (identical skills / abilities)
3) Labour market is perfectly competitive (we will study this later)
4) Product market is perfectly competitive (we have already studied this)
5) Firms are profit maximisers.

Question 8

Marginal revenue product (MRP) theory revenue-max condition

Answer 8

Marginal Revenue Product = Marginal Cost of Labour

Why?

• MCL is horizontal because labour is homogeneous.
• Therefore all workers receive the same wage.
• MRP represents the demand for labour.

Question 9

Marginal revenue product (MRP) theory limitations

Answer 9

• Unrealistic assumptions e.g. workers are not homogeneous.
• Difficult / dangerous / unethical to measure productivity and efficiency in some some jobs e.g. doctors treating patients.
• Collaborative work (teamwork) makes it difficult to measure individual productivity.
• Some workers set their own pay e.g. the self-employed or company directors.
• The labour market is unlikely to be perfect e.g. minimum wages (trade unions and governments), monopsony employers.

Question 10

Shifts in the demand for labour curve

Answer 10

1) Change in productivity of labour
e.g. increase in productivity → increase in MPP → increase in MRP → increase in DL
2) Change in price of the product
e.g. increase in P → increase in MR → increase in MRP → increase in D
3) Change in demand (D) for the product
.g. increase in D (product) → increase in DL (due to derived demand)
4) Change in the price of a substitute for labour
e.g. increase in price of capital → increase in D

Question 11

Elasticity of demand for labour

Answer 11

a measure of the responsiveness of the quantity of labour demanded to a percentage change in wage rates

Question 12

Elastic demand for labour

Answer 12

%ΔQDL > %ΔW

Question 13

Inelastic demand for labour

Answer 13

%ΔW > %ΔQDL

Question 14

Factors affecting elasticity of demand for labour

Answer 14

1) The ratio of labour costs to total costs
2) Availability of capital / ease of substitution
3) PED of final product
4) Time

Question 15

The ratio of labour costs to total costs (Factors affecting elasticity of demand for labour)

Answer 15

a high ratio of labour costs to total costs results in a more elastic demand for labour because there will be a bigger impact on total costs

Question 16

Availability of capital / ease of substitution (Factors affecting elasticity of demand for labour)

Answer 16

greater availability of capital / easier to substitute capital for labour → more elastic demand for labour.

Question 17

PED of final product (Factors affecting elasticity of demand for labour)

Answer 17

due to derived demand, if the demand for the product is price elastic, the demand for labour will be elastic

Question 18

Time (Factors affecting elasticity of demand for labour)

Answer 18

the longer the time period, the more elastic the demand for labour is because it becomes easier to replace labour with capital and labour contracts expire.