3.5.1 Demand For Labour

Question 1

Why is demand for labour known as derived demand?

Answer 1

• the demand for labour is dependent on demand for the final goods + services that they produce

Question 2

When will demand for labour increase?

Answer 2

• if there is a high demand for the final goods + services they produce businesses will demand more labour; e.g. in an economic boom
• demand for labour also increases when workers become more productive e.g. they have better skills

Question 3

When will demand for labour fall?

Answer 3

• when demand for a final good falls the demand for labour will fall
• firms can choose to use capital if labour becomes more expensive

Question 4

What does the demand curve for labour show?

Answer 4

• the MRP curve shows the number of workers the firm will employ at any given wage rate (demand curve for labour)
• y axis = wage
• x axis = quantity of labour

Question 5

What is the economic theory for demand in labour?

Answer 5

• suggests that the higher the wage, the less workers will be demanded/employed

Question 6

Why is the demand for labour curve downward sloping?

Answer 6

• in the short run = capital likely to be fixed = diminishing returns set in = wages will have to fall to encourage employers to take on more workers
• in the long run = all factors of production variable = firms will substitute capital for labour as wage rates rise

Question 7

What is MPP?

Answer 7

• marginal physical product
  = output of an additional worker

Question 8

What is MRP?

Answer 8

• marginal revenue product
  = the amount of revenue an additional worker brings in

Question 9

How to calculate MRP?

Answer 9

MRP = price x MPP

Question 10

What does a shift in the demand curve for labour mean?

Answer 10

• a shift in demand curve from MRP1 to MRP2 means that the MRP for labour has increased at any given output
• could have been caused by an increase in price of final product = MPP of worker has increased OR higher cost of capital = labour is a substitute

Question 11

What is wage elasticity of demand?

Answer 11

How wage sensitive is the demand for labour

Question 12

What does labour intensive mean?

Answer 12

• A greater amount of production is produced by labour than capital
• e.g. education, health sectors more labour intensive than car production

Question 13

What influenced the PED for labour?

Answer 13

• time - longer the time period = more elastic PED for labour will be as firms can replace labour with capital in the long run BUT in the short run contracts may mean firms have no choice but to employ the same number of workers = PED inelastic
• substitutes - if easy to change from labour to capital the demand for labour is more elastic
• PED of the product - derived demand = if PED for product is high (elastic) = PED for labour will be elastic as demand is price sensitive + can’t absorb high wage costs