3.5.1 - Demand For Labour Flashcards
Who Demands Labour?
Firms.
Who Supplies Labour?
Individuals.
When The Demand For Labour = The Supply For Labour, What Do We Get?
Equilibrium wage rate.
What Does The Demand Curve For Labour Show, For An Individual Firm?
How many workers firms will hire at any given wage rate over a given period of time.
The Demand For Labour Is A Derived Demand, What Does This Mean?
(2 Points)
~ Demand for labour depends on the demand for goods and services.
~ If demand for goods increases, then the demand for labour will increase. Vice versa.
What Will Firms Depend Their Demand Decisions Of Labour On?
Marginal revenue product (MRP).
What Is MRP & How Do You Calculate It?
(3 Points)
~ The extra revenue generated when an additional worker is hired.
~ MRP curve is the demand curve.
~ MPP (MP) x MR.
MRP Theory Can Be Shown Numerically, What Does The MRP Curve Look Like?
(7 Points)
Assumptions:
~ This firm is in the SR, currently experiencing the law of diminishing marginal returns.
~ This firm is operating in perfect competition and labour market, firm is a price taker and a wage taker.
MRP Curve:
~ Shaped as such due to the law of diminishing marginal returns, the 1st, 2nd and 3 worker all were bringing in more revenue than the previous worker, this could be due to specialisation gains and excess capital and land to be used up, increasing productivity and MRP.
~ After the 3rd worker is hired, the 4th, 5th and 6th worker suffer from lower productivity due to the constraints of fixed FOPs, individual productivity begins to decrease, decreasing MRP.
~ Firm should employ 5 workers at a wage rate of 60.
~ This wage rate is also the marginal cost for labour (MCL), every time it hires another worker it pays an extra £60.
~ Firms will hire workers up until MRP = Wage, this is because if the firm hired a 6th worker, MC will be higher than the MRP, the firm would loose out if it hired this worker.
Where Will Firms Hire Workers Up Until?
MRP = Wage (MCL).
What Does The MRP Curve Show A Firm?
(2 Points)
~ Show at any given wage rate, how many workers a firm should employ.
~ Gives the condition for firms to maximise the revenue brought in from its workers.
What Does The Labour Demand Curve Look Like For An Individual Firm?
MRP curve.
What Does The Labour Demand Curve Look Like For An Industry (Market)?
Demand curve is downward sloping, due to it being the total MRP for all employees within that industry.
What Do Both Individual & Industry (Market) MRP Curve Show With Regards To Their Relationship & Why?
(5 Points)
~ That there is an inverse relationship between wage and quantity of workers.
~ In the SR, it is due to the law of diminishing marginal returns.
~ In the LR, due to the substitutability of capital and labour.
~ At higher wage rates firms will see that labour is not cost effective and placing cheaper capital is better, leading to the quantity of workers decreasing at higher wage rates.
~ At lower wage rates, workers become more competitive and cost effective, meaning that there is a greater number of workers who are likely to be employed by firms.
What Do Movements Along The Demand Curve For Labour Look Like & Explain It
(2 Points)
~ At higher wages the workers must have a high MRP, if firms are to employ them at this higher wage, decreasing the quantity of workers (Q1 -> Q2).
~ At lower wages the workers have lower MRP, which justifies why firms employ them, increasing the quantity of workers (Q1 -> Q3).
What Are Criticisms Of MRP Theory?
(2 Points)
~ Productivity might be very difficult to measure in certain industries, so hard to determine the MRP. E.g. Teachers.
~ Teamwork makes it difficult to measure individual productivity.
What Are Factors Other Than Wage That Influence The Labour Demand Curve?
(5 Points)
~ P D P C. (Price, Demand, Productivity, Capital).
~ 1) Change In The Final PRICE Of The Product Labour Is Making -> If the price for the product changes it will affect MRP.
~ 2) Change In DEMAND For The Final Product -> Labour is a derived demand.
~ 3) Change In Labour PRODUCTIVITY -> Affects the MP of labour, affecting the MRP.
~ 4) Change In The Price Of CAPITAL -> If the price for capital goes down then the demand for labour will decrease. Vice versa.
What Does The Elasticity Of Labour Demand Measure?
The responsiveness of labour demanded, given a change in the wage rate.
What Are Factors That Determine The Elasticity Of The Labour Demand?
(5 Points)
~ S E C T.
~ 1) Substitutability Of Labour For Capital -> The more substitutable capital is for labour, the more wage elastic labour demand is going to be. Vice versa.
~ 2) Elasticity Of Demand For The Final Product -> If the elasticity of demand is inelastic and wages go up, they can then pass on those higher wages via higher prices. Vice versa.
~ 3) Cost Of Labour As A % Of Total Cost -> The greater the labour costs are as a % of total cost the more wage elastic labour demand is. Vice versa.
~ 4) Time Period -> LR = Elastic as it is much easier to bring in capital for a firm. SR = Inelastic as it is difficult to increase capital.
