3.5.1 Factors affecting demand of labour & elasticity

Question 1

What economic agents demand labour

Answer 1

• Firms

Question 2

Describe the relationship between the wage rate and the demand for labour

Answer 2

• Inverse

Question 3

What factors determine the demand for labour

Answer 3

1 - Demand for the final product
2 - The price of capital substitute
3 - Other labour costs such as national insurance
4 - Productivity of labour

Question 4

Explain the derived demand for labour

Answer 4

• An increase in demand for the final product a firm produces, this will increase the demand for labour.

Question 5

What is MRP

Answer 5

• The additional total revenue as a result of employing one more worker

Question 6

What are the factors which affect the elasticity of demand for labour

Answer 6

S - Substitutability of capital for labour
E - Elasticity of demand for the demand of the final product
C - Labour costs as a percentage of final costs
T - Time period

Question 7

Explain elasticity of final product.

Answer 7

• If final product is price inelastic, this will allow the firms to charge a higher price and pass on the costs of higher wage rate

Question 8

Explain time period

Answer 8

• In the short run, one FOP is fixed, therefore firms may not be able to substitute capital for labour
• In the long run, all FOP variable, may be more wage elastic