3.5.1 Demand for labour Flashcards
Why is labour a derived demand?
Firms demand workers as they need them to make goods and services demanded by their customers
What is demand for labour?
The willingess and ability for employers to
What is the marginal productivity theory?
Demand for any factor of production depends on its MRP
What is marginal revenue product of labour?
The extra revenue gained by the firm from employing one more worker
MPP x MR
What is the marginal cost of labour?
The cost of hiring on additional worker
When MRP = MC (wage)….
The firm has optimum number of workers to maximise profits
When MRP is greater than MC (wage)…
The firm could increase profits by employing more workers
When MRP is less than MC (wage)…
Workers are adding more to costs than to revenue - firm is employing too many workers
MRP curve is the same shape as…
the MPP curve
Why is MPP downward sloping
The law of diminishing returns - As each new worker is employed, the amount of additional output produced falls
How does productivity affect demand for labour?
Low productivity = Higher unit labour costs = Less demand as firm is less competitive
High productivity = Lower unit labour costs = More demand as firm is more competitive
If wages rise but productivity rises equivalently, demand for labour is unaffected as unit labour costs stay the same
The MRP curve is also the…
demand curve
Factors which affect the demand of labour (3)
- Change to the price of goods and services sold
- New technology or training which increases productivity
- Changes to the cost of labour
What is elasticity of demand for labour?
the responsiveness of quantity demanded of labour to a change in the wage rate
Factors which affect elasticity of demand for labour
- Time period - more elastic in the long run
- Substitution of factors of production - if labour can be substituted by capital = elastic
- Proportion of wages to total costs - high = elastic, low = inelastic
- PED of final product - PED is elastic = elastic, PED is inelastic = inelastic
