3.5.1 Demand for Labour

Question 1

What is the ‘demand for labour’?

Answer 1

The willingness and ability of firms to hire workers at a given wage rate at any particular time

Question 2

How is a wage a derived demand?

Answer 2

The demand for a wage comes from the demand to consume goods and services

Question 3

How will firms base their decision off to hire a worker?

Answer 3

Off the Marginal Revenue Product

Question 4

What is the Marginal Revenue Product?

Answer 4

The extra revenue generated from hiring an additional worker

Question 5

How do you calculate the MRP?

Answer 5

Marginal Physical Product x Marginal Revenue

Question 6

What is Marginal Physical Product?

Answer 6

How much a worker produces

Question 7

In the short run for a firm, what will they experience in terms of demanding their labour?

Answer 7

At least one factor of production is fixed, meaning the law of diminishing returns will set in at one output point

Question 8

At point A in the short run demand for labour curve, what is happening and why?

Answer 8

Each additional worker is bringing in more revenue than the previous worker, their marginal revenue product is increasing. This happens because of specialisation, excess land and capital which they can fill

Question 9

At point B on the short run demand for labour curve, what happens?

Answer 9

The constraints of the fixed factors of production set in, law of diminishing marginal returns sets in and MRP falls

Question 10

What is a wage also known as?

Answer 10

Marginal Cost of Labour

Question 11

If the wage (marginal cost of labour) is equal to the MRP, should they hire more workers?

Answer 11

No, because any additional worker when diminishing marginal returns sets in will lead to a fall in MRP up to the point where MCL > MRP meaning the firm will lose money

Question 12

If the wage (marginal cost of labour) is equal to the MRP, should they hire less workers?

Answer 12

No, because although marginal revenue product is falling, total revenue for the firm is still increasing so reducing the amount of workers will only lead to a fall in total revenue

Question 13

What does the demand for labour curve look like for a market?

Answer 13

Inverse relationship between wage and quantity of workers demanded. Just like the normal demand curve for a product

Question 14

Why, in the long run, is there an inverse relationship between wage and quantity?

Answer 14

Because at higher wage rates, because factors of production are not fixed, firms can substitute capital for labour

Question 15

What factors affect demand for labour (causing a shift)?

Answer 15

1. final price of product labour is making
2. change in demand for final product
3. changes in labour productivity
4. changes in the price of capital

Question 16

How will the final price of the product the labour is making shift the demand for labour curve?

Answer 16

If the final price of the product rises, the marginal revenue for the firm will rise, causing the MRP to rise further shifting the demand for labour curve to right. The opposite is true for a fall in the final price

Question 17

How will a change in demand for the final product shift the demand for labour curve?

Answer 17

If the demand for the end product increases, the demand for labour will increase because it is a derived demand.

Question 18

How will a change in labour productivity shift the demand for labour curve?

Answer 18

If productivity increases, marginal physical product will increase as workers can produce more in a certain period of time leading to an increase in the MRP

Question 19

How will a change in the price in capital shift the demand for labour curve?

Answer 19

In the long run, all factors of production are variable, so if the price of capital falls the demand for labour will fall as firms will want to switch to the more price effective machines e.c.t

Question 20

What is the elasticity of the demand for labour?

Answer 20

Measures the responsiveness of labour demanded given a change in the wage rate

Question 21

What are the 4 factors that affect the elasticity of demand for labour?

Answer 21

1. substitutability of labour
2. elasticity of the product
3. cost of labour as a % of total costs
4. time period
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Question 22

How does substitutability of capital labour affect the elasticity of demand for labour?

Answer 22

If there are many substitutes available in terms of capital, demand for labour will be elastic

Question 23

How does the elasticity of demand for the product affect the elasticity of demand for labour?

Answer 23

If the PED of final product in inelastic and wages go up, demand for labour won’t change all that much as producers can pass the extra cost (wage) onto the consumer with the inelastic PED

Question 24

How does the cost of labour as a % of total costs affect elasticity of demand labour?

Answer 24

The greater the costs of labour are to total costs, the more elastic the demand for labour would be

Question 25

How does the time period affect the elasticity of demand for labour?

Answer 25

In a short time period, firms will have an inelastic demand for labour as there isn’t time to look for alternatives