3.6.1 - The Demand for Labour Flashcards

1
Q

What is a factor market?

A

A market in which factors of production are bought and sold.

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2
Q

What type of market is the labour market?

A

A factor market.

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3
Q

What are the factor markets?

A

Markets for:
Land
Labour
Capital
Enterprise

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4
Q

Who supplies the labour in the labour market?

A

Households.

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5
Q

Who demands the labour in the labour market?

A

Businesses.

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6
Q

How do factor markets differ from goods markets?

A

The firms demand the factors and households / other businesses supply them.

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7
Q

Why is the labour market important to the goods market?

A

The labour creates goods that businesses sell.
The labour is paid for their services meaning they can purchase goods from other businesses.

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8
Q

What do households require to exercise demand?

A

An ability to pay for the good. (income)
A willingness to pay for the good.

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9
Q

How do most households make income?

A

Selling their labour services in a labour market.

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10
Q

How can you draw the relationship between households and firms?

A

In a circular manner.

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11
Q

What is derived demand?

A

Demand for a good / factor of production, not wanted for its own sake, but as a consequence of the demand of something else.

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12
Q

Why do firms demand labour?

A

They produce goods which increases their profits.

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13
Q

What is a requirement for long run employment of labour?

A

Assuming firms are profit maximising, the outputs produced must be sold for at least a normal profit in the goods market.

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14
Q

What is the marginal physical product of labour?

A

The addition to a firm’s total output brought about by employing one more worker.

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15
Q

What is a synonym of marginal physical product of labour?

A

Marginal returns of labour.

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16
Q

What does MPPL measure?

A

The amount by which a firm’s total output rises in the short run (holding capital fixed) as a result of employing one more worker.

17
Q

What does this graph show?

A

The laws of diminishing marginal returns of labour when capital is fixed.

18
Q

What could be said about this graph?

A

The MPPL is always decreasing whenever one more employee is hired.
This contrasts with other theories that marginal returns are a parabola that increase before decreasing.

It could be argued that this graph is even further simplified over a parabolic marginal returns graph that more closely resembles the real world.

19
Q

What is the marginal revenue product of labour?

A

The monetary value of the addition to a firm’s total output brought about by employing one more worker.

20
Q

How can you convert a marginal physical product graph to a marginal revenue product graph?

A

Multiply the marginal physical product by the MR of the good.

21
Q

If the MPPL of a worker is 5, and the MR is £25, what is the MRPL of the worker?

A

£125.

22
Q

In a perfectly competitive market, what can be said about the MR of a good relative to its price?

A

They are equal and horizontal.

23
Q

What are the equations for MRPL?

A

MPPL * MR = MRPL

(under perfect competition) MRPL = MPPL * price

24
Q

What happens to the MRPL a good is sold in an imperfectly competitive goods market rather than a perfectly competitive goods market?

A

The MRPL will decrease much faster as the MR from selling an extra worker’s output also falls as output increases.

Along with this, firms have a downward sloping demand curve and therefore has to reduce the price of the product in order to sell the extra output.

25
Q

What does the demand curve for labour show?

A

The relationship between wage rate and number of workers employed.

26
Q

What happens to labour employment when wage rates are low?

A

The firm hires more labour.

27
Q

Where is the market demand curve for labour when there is more than one employer in a market?

A

The market demand curve is shifted to the right by some factor of the individual firm.

28
Q

What can be said about the relationship between these two graphs?

A

The curve on the right is equal to the sum of each individual firms demand for labour on the left.

29
Q

Why is there a shift in market demand curves for labour?

A

A change in labour productivity.
A change in technology.
- Technical progress making labour more productive relative to other factors.
- Technical progress making labour less productive relative to other factors.

A change in marginal revenue.

30
Q

Why is a change in labour productivity a reason for market demand curve for labour to shift?

A

A firm’s demand curve is the MRP curve of labour facing the firm. If labour productivity increases, MRP also increases, so more labour is demanded at each wage rate, and market demand is shifted to the right.

31
Q

Why does a change in technology (making labour more productive relative to other factors) cause the market demand to shift to the right?

A

If technology improves to make labour more efficient, or technology degrades making production more labour intensive, firms are likely to substitute labour for other factors of production, making the demand curve for labour shift to the right.

If technology improves, productive and dynamic efficiencies are also likely to improve, reducing the cost of making the product. If this leads to lower costs and higher demand, the demand of labour increases.

32
Q

Why does a change in technology (making labour less productive relative to other factors) cause the market demand to shift to the left?

A

As technology improves, it may cause automation to become more viable. This means that firms can produce for 24 hours a day with no wage costs, making capital far more productive relative to labour and thereby causing the market demand for labour to shift to the left.

However, if we divided the demand for labour into high MRP and low MRP, we may see the demand for high MRP workers increase at the expense of low MRP workers as they need engineers to fix and make new automated machines.
(This is known as technical unemployment, and is a type of creative destruction)

33
Q

What is technical unemployment?

A

Workers with low MRP are replaced by capital which can work continuously.

34
Q

What is the elasticity demand for labour?

A

The proportionate change in demand for labour following a change in the wage rate.

35
Q

What is the equation for elasticity of demand for labour?

A

Proportionate change in quantity of labour demanded / proportionate change in the wage rate

36
Q

Why are particular types of labour relatively inelastic in demand?

A

When relevant wage costs form such as small part of total production costs (the importance of being unimportant).
When the demand for a good / service is inelastic.
When it is difficult to substitute other factors of production for the labour currently employed.
In the short run, rather than the long run, it often takes time for employers to adjust the method of production.

37
Q

Why is there currently a massive labour shortage in the fruit picking industry?

A

There have been marked improvements in labour markets in Eastern Europe. (unemployment falling in Bulgaria, Romania etc.)
Brexit brought about uncertainties for EU workers who moved back to their home countries.
Incredibly low appetite for British workers to pick fruit.