3.5.1 Demand for Labour Flashcards
What is the ‘demand for labour’?
The willingness and ability of firms to hire workers at a given wage rate at any particular time
How is a wage a derived demand?
The demand for a wage comes from the demand to consume goods and services
How will firms base their decision off to hire a worker?
Off the Marginal Revenue Product
What is the Marginal Revenue Product?
The extra revenue generated from hiring an additional worker
How do you calculate the MRP?
Marginal Physical Product x Marginal Revenue
What is Marginal Physical Product?
How much a worker produces
In the short run for a firm, what will they experience in terms of demanding their labour?
At least one factor of production is fixed, meaning the law of diminishing returns will set in at one output point
At point A in the short run demand for labour curve, what is happening and why?
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
At point B on the short run demand for labour curve, what happens?
The constraints of the fixed factors of production set in, law of diminishing marginal returns sets in and MRP falls
What is a wage also known as?
Marginal Cost of Labour
If the wage (marginal cost of labour) is equal to the MRP, should they hire more workers?
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
If the wage (marginal cost of labour) is equal to the MRP, should they hire less workers?
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
What does the demand for labour curve look like for a market?
Inverse relationship between wage and quantity of workers demanded. Just like the normal demand curve for a product
Why, in the long run, is there an inverse relationship between wage and quantity?
Because at higher wage rates, because factors of production are not fixed, firms can substitute capital for labour
What factors affect demand for labour (causing a shift)?
- final price of product labour is making
- change in demand for final product
- changes in labour productivity
- changes in the price of capital