3.5.1 Demand for labour Flashcards
The economically active population
The people in an economy who are capable of, and OF WORKING AGE
Derived demand
The demand for labour is driven by the demand for the goods that this labour would provide
- When demand for these goods increases, so does the demand for labour.
- When demand for goods decreases, the derived demand for labour also decreases, resulting in unemployment.
Potential reasons for a shift in the demadn curve of labour
- A change to the price of goods sold – if demand falls for a firm’s product and its price falls, this would decrease the firm’s demand for labour. Curve would shift left.
- Factors that affect labour productivity – e.g. if new technology or training increases the productivity of workers, this would increase the demand for labour. Curve would shift to the right.
- Increases to the costs of labour – the cost of labour doesn’t only include wages. It also includes costs such as training, uniforms, safety equipment, and National Insurance contributions. If any of these labour costs increased, this would decrease the demand for labour. Curve would shift to the left.
Marginal cost of labour
The cost of hiring one additional worker.
What is the demand for labour like in the long run for developed economy
In long run all factors of production are variable, means that firms can choose production technique labour more intensive in developed economies so companies choose capital intensive manufacturing
What is the demand for labour like in the long run for developing economy
Labour is relatively cheap so in long run labour intensive manufacturing is chosen.
Marginal revenue product of labour
The extra revenue gained by the firm from employing one more worker.
How does the MRP affect how many workers the firms employ?
Firms will only hire workers if they add more to a firm’s revenue than they add to its costs.
What does MRP theory suggest
Firms should only employ workers that generate revenue more than what their cost to the firm is.
Elasticity of demand for labour
The sensitivity of demand for labour when the wage level changes.
How is the elasticity of demand for labour calculated?
Dividing the percentage change in the quantity divided of labour by the percentage change in the wage rate.
Factors influencing the elasticity of demand for labour
- Time: It is always more elastic in the long run as firms can make plans for the future.
- Availability of Substitutes: If labour can be substituted easily by capital then the demand is more elastic.
- Proportion of a firm’s total costs: The demand will be inelastic because a wage increase will have little impact on total costs.
- PED of product made: The more price elastic the demand for a product, the more elastic the demand for labour will be (because labour is derived demand).
Generally, a firm’s demand for labour will …. if wages rise
Decrease
- However, this depends on whether the wage increase is accompanied by an increase in productivity (the output per worker per hour).
Unit labour costs
The labour costs per unit of output.
What do high unit labour costs suggest about an economy?
There is low productivity (which would reduce a country’s international competitiveness).
What does MRP mean
Marginal revenue product the number of extra revenue of output a worker produces.
mrp equation
MRP = marginal physical product of labour(MPP) X marginal revenue (MR)
FACTORS THAT AFFECT ELASTICITY SUPPLY OF LABOUR
- Availability of suitable Labour in other industries: how easily can firms get labour from other industries
- Time
- Extent of underemployment and unemployment.
what main factors affect supply of labour
- Monetary and non monetary factors
Immobility of labour
-Geographical immobility : Workers find it hard to move from one area to another.
- Occupational immobility : Mismatch of skills from current occupation of workers to where vacancies are in labour market.
Factors to
