3.5 Flashcards
define derived demand
when the demand for the end product has effect on the demand of a good
Define the Marginal Physical Product of Labour (MPPL)
the addition to output produced by one more unit of labour
what is the law of diminishing marginal returns
when you add more of a variable factor to a fixed factor eventually the marginal product (MP) starts to fall
define marginal revenue product and write the formula
the value of the output produced by the last unit of labour added. MRP = MPP x MR
Draw an MRP curve/the demand curve for labour
Wage y axis quantity of labour x axis fixed wage rate as horizontal line (We) MRP curve going up and then going down past straight line (S=AC=MC) equilibrium We Qe
What is Marginal Productivity Theory
states that a firm will employ labour up to a point at which the MRP of labour is equal to the Marginal Cost of the extra worker. in this way the firm will be profit maximising.
identify and explain four factors that would shift the demand curve for labour
- if the price of the end product increased - this would increase the marginal revenue and so the MRP would increase.
- if the MPP increased because of an improvement in the productivity of labour, this would also increase MRP
- a fall in non-wage costs of employing workers - this would make it cheaper for firms to employ workers and increase demand at every price level
- an increase in the price of capital that replaces labour - this would make the subsitute to labour cheaper, and so firms may swap labour for capital, reducing demand for labour
what is the formula for calculating the Marginal Product if you were given a table of data?
change in labour
identify and explain four factors that would affect the elasticity of demand for labour
- availability of capital that could replace labour - if labour is easily replaceable with a machine, then demand will be elastic.
- price elasticity of the end good - if this is very inelastic, then firms can pass on any wage increase in higher prices, without worrying too much about losing market share making demand for labour inelastic.
- labour cost as a % of total costs - the higher the % of costs made up by labour, the more elastic for demand for labour will be.
- time - the longer the time period, the more elastic demand for labour will be, as the firm will be able to find ways of substituting labour
using MRP theory, explain why a footballer gets paid more than a plumber
the extra revenue generated by a footballer in higher ticket sales, and increased merchandise and advertising/sponsorship revenue means that the MR is higher than a plumber.
what is the relationship between leisure time and work?
they are substitutes. a person can choose to allocate their time to leisure OR work, but cannot do both at once.
what is the opportunity cost of one hour of work
one hour of leisure
what is meant by the substitution effect of a wage increase
this is when wages increases, it increases the opportunity cost of leisure, so workers will substitute leisure hours for work hours, creating a positive relationship between work and wages.
what is meant by the income effect of a wage increase?
this is when a worker has a target income and once they have achieved this income, then any further wage rises will lead to that individual reducing their work time and taking more leisure, in this case leisure is a normal good so people will want to consume more of it when their income rises. this suggests that there might be a negative relationship between wages and hours worked.
why might an individual’s supply of labour be backward bending
this is when the income effect outweighs the substitution effect of a wage rise, and the individual start to supply more of their labour, the more the wage rises.
what is the supply curve of labour also known as
the average cost curve of labour - this shows us how many workers would be prepared to supply their labour at each wage rate and therefore the average wage is equal to the average cost of firm
other than wages identify 3 other factors that would affect an individual’s supply of labour
- potential for promotion
- job satisfaction
- non monetary benefits
what is meant by non monetary benefits
rewards that are not cash, such as access to facilities, health insurance, and holiday entitlement
draw an industry supply curve of labour
wage y axis
q of labour x axis
normal supply curve
identify 5 factors that would affect the supply of labour
- immigration
- improvements in occupational and geographical immobility of labour
- requirement for qualifications
- welfare/out of work benefits
- wages and conditions in other jobs
draw a curve representing the supply of labour to an individual firm, when the labour market is perfectly competitive
wage rate y axis
q of labour x axis
Wage rate horizontal line S = AC = MC
MRP(L) curve going up and then down past wage rate line
draw a curve representing the supply of labour to an individual firm, when the labour market is monopsonistic
two skewed supply curves. left one MC of labour, right one is supply of labour. one MRP = D curve wages y axis q of labour x axis equilibrium at mrp and supply curve inward shift
define geographic immobility of labour
when a worker cannot/will not move from one location to another to take up a job vacancy
what are the causes of geographic immobility
- house price differentials
- family ties
- children schooling
- lack of knowledge
define occupational immobility of labour
when a worker cannot/will not move from one profession to another
what are the causes of occupational immobility
- lack of transferable skills
- lack of willingness or perceived inability to retrain
explain two strategies to improve occupational immoblity
- retraining schemes - government can educate workers who are structurally unemployed to gain the skills needed to fill the job vacancies that exist
- apprenticeships for mature workers - firms can take up workers at a reduced rate and train them up in the skills needed for the job vacancies
explain two strategies to improve geographic immobility
- housing market schemes, to build houses that are affordable to reduce costs of location
- improvements in transport infrastructure to allow workers to commute to workers over longer distances
draw a diagram showing labour market equilibrium in a competitive market
supply and demand curve
draw a diagram showing labour market equilbrium for a single firm in a competitive labour market
MRP curve going up and going down
fixed wage rate line
draw a new equilibrium when there is an increase in the productivity of labour
if productivity increases, demand for labour increases, equilibrium wage rises. outward shift of demand curve
draw a new equilibrium when the training requirements for the job increase
inward shift of supply
draw the monopsony labour market diagram, marking equilibrium wage and quantity of labour employed. on the same diagram contrast the wages that would be paid in a competitive labour market, to the wages and employment levels in a monopsonistic market
skewed supply curves, MC of labour on left and supply on right mrp curve (d)
eq. wage is £30, and three units of labour are employed
competitive wage would be £40, and 4 units of labour are employed - so monopsony results in lower wages and less employment
draw a diagram to illustrate the outcome if there is a national minimum wage/union power in a competitive labour market.
wage y axis
q labour x axis
one s and one d curve
minimum wage line above equilibrium (W1)
Draw a diagram to illustrate the outcome if there is a NMW/union power in a monopsony market
two skewed AS curves (MC on left and Actual Cost AC on right (supply of labour)). MRP curve going down
min wage line going through AC and MRP equilibrium.
how does elasticity affect the impact of a NMW?
the more elastic the demand for labour the more unemployment will be created as firms are very sensitive to the wage rate and will decrease the quantity of employees significantly if wages rise.
the more elastic the labour of supply is, the more unemployment will be created as the higher wages will attract many more workers, but there will not be demand for them
explain three labour laws that are used to protect workers from monopsony power in labour markets
- national minimum wage regulates the minimum amount that a worker can be paid legally
- dismissal laws make it illegal for firms to sack employees or making them redundant without going through steps such as proving that the job rather than the person is no longer required
- discrimination laws prevent firms from paying or treating workers differently based on their gender, ethnicity etc
draw a diagram to illustrate the impact of a skills shortage
a skills shortage means that there is excess demand for labour at the current wage rate.
max price diagram
explain 2 possible solutions to a skills shortage
- pay more to reduce the excess demand
- import workers with the skills needed with an active immigration policy encouraging workers with particular skills
why is youth unemployment more of an issue than unemployment with older workers
if workers do not get a job when they are young, they may never work (hysterisis) and discouraged workers may prevent them from entering the labour market.
how does increasing the retirement age affect the labour market
it increases the labour supply as there are less people leaving the active labour market, and the same number entering the market as school/uni leavers (ceteris paribus)
how does increasing the compulsory school age affect the labour market
it decreases the supply of labour temporarily as in the first few years students will be leaving school and entering the labour market
define underemployment
when a worker works less hours than they want to, and/or are working in a job which they are over-qualified
how does the introduction of zero hours contracts affect the labour market equilibrium
- it could lead to underemployment as workers are technically in jobs, but may not be given any hours
- skills may erode as workers are not able to be in training and education and arent working either
- reduces job security
