3.5.1 - Demand for Labour Flashcards
Define derived demand
Demand for a factor of production such as labour as a result of demand for
the final product that that factor of production can produce.
Define human capital
The amount of skill, knowledge, talent, experience and ability of workers.
Human capital can be increased through education and training.
Define incentive scheme
A motivational scheme for employees, designed to encourage increased
productivity / efficiency / working to the company objectives. Examples could
include share schemes, bonuses, commission on sales, additional holiday,
company car and formal awards.
Why is labour derived demand
- when firms demand workers its because they need them to make the goods that are being demanded by their customers. So the demand for labour is driven by the demand for the goods that this labour would produce
- when demand for these goods increase, so does the demand for labour
Describe labour demand curve
- downward sloping
- lower the price of labour the greater demand will be. the price of labour is referred to as the wage rate or salary
Describe factors that shift the demand curve for labour
1) changes in productivity of labour
2) changes in the price of the good labour produces
3) changes in the demand of the good labour produces
4) changes in the price of capital
What are movements along the demand curve for labour (or MRP curve) caused by
changes in the wage rate
Changes in the productivity of labour
if labour becomes more productive for some reason then this will lead to increase in demand for labour
- higher levels of productivity reduces unit costs of labour
- if wages increase by there is an equivalent increase in worker prod then unit labour costs stay the same and labour demand is the same
- increase prod increase marginal products so MRP increases bc MRP = MP X MR
Changes in the price of the good labour
- if the price of the good or services (MR) labour produces increases, economic theory predicts that firms will increase production so more labour needed bc MRP = MR X MPP sot he increase in MR will proportionately increase MRP and labour demand decisions based on MRP
Changes in the demand of the good labour produces
if the demand increases, more workers needed in that industry so demand for labour increases due to boom or consumer preferences shift
Changes in price of capital
Firms can substitute labour for capital so if capital becomes more expensive firms will employ more labour
- in developed world, firms will specialise in capital intensive processes becuase labour is high-skilled expensive
What do firms base labour demand decisions on
marginal revenue product: the extra revenue generated when an additional worker is hired
MRP equation
MRP=MARGINAL PRODUCT XMR
Law of diminishing marginal returns
marginal product increases at first but then decreases and is limited in the short run by fixed FOP
assumtpion made
firms operate in perfect competition so firm is a price taker and P =AR =MR
- PC means they are also wage takes
Why is the labour demand curve for a FIRM a rainbow shape
law of diminishing marginal returns first few workers bring in more revenue than the previous one so TR icnrease as specialisation occurs and there is excess land and captial. However law of DMR sets in
What should firms do when hiring labour
hire workers until MRP=W
wage is marginal cost of labour in PC
WHY?
if W>MRP, the worker will cost more to the firm than the additional revenue that they will bring in so they are adding to their costs by hiring more
if W<MRP, the workers are brining in more revnue then cost so bringing in more workers they can bring in even more reveneu and therefore profit until it is maximised at MRP=W
Why is MRP curve the labour demand curve
shows the quantity fo labour demanded at each wage rate
comapre firm and industry labour demand curve
- firm: MRP curve
- ## industry: normal downward sloping due to MRP
Why does the firm and industry demand for labour curve have an inverse relationship between wages and Q of workers
SR = law of diminishing returns
LR = substitubality of capital and labour
criticisms of MRP theory
- how to measure productivity? v hard
- teamwork makes it hard to check individual productivity
- the self employed? they dont pay themselves according to MRP
- imperfect labour markets (trade unions bargain for higher wages above their marginal revenue product)
- this means two key assumptions of the MRP breakdown
1) firms decide how much labour to hire absed on MRP
2) workers are paid based on MRP
