4.1.6.1 Demand for labour - MRP theory

Question 1

Labour is a derived demand for…

Answer 1

output.

Question 2

Define marginal revenue productivity

Answer 2

MRP - the addition to a firm’s revenue from employing an additional unit of a factor of production, usually labour

AKA - the demand for labour

Question 3

Define marginal physical product

Answer 3

MPP - the addition to output from employing an additional unit of a factor of production, usually labour

Question 4

Why does the MRP = D for labour?

Answer 4

A firm’s demand for labour depends on the productivity of additional units of labour (MPP) multiplied by the selling price of the product

Question 5

What does the demand curve for labour show?

Answer 5

Usually referred to as the MRP curve - shows relationship between the wage rate and the number of workers employed.

MPP in the labour market x marginal revenue obtained in the market for the firm’s product
(MPP x MR = MRP)

Question 6

In a perfectly competitive product market, MR is…

Answer 6

constant - therefore, gradient of MPP and MRP curves will be the same

Question 7

Determinants of labour demand

Answer 7

Wage rates - higher wages = contractionary movement along D for labour curve

Labour productivity - as output per worker rises - makes them more valuable to employer - increase in demand for labour

Price of substitute factors - e.g. - capital equipment becomes cheaper - leads to reduction in D for labour, as seen in market for supermarket checkout assistants

Other labour costs - includes employers’ national insurance and pension contributions - if these rise, D for labour falls

Question 8

Define elasticity of demand for labour

Answer 8

Measure of responsiveness of the quantity of labour demanded following a change in the wage rate.

Question 9

Formula for elasticity of demand for labour

Answer 9

% change in Q of labour demand / % change in wage rate

Question 10

Determinants of elasticity of demand for labour

Answer 10

Ease of substitution - the easier the substitute, the more elastic

Time - longer time period, easier it becomes to substitute - makes demand more elastic

Elasticity of demand for the good or service - direct relationship - if elasticity of demand for good or service is inelastic, demand for labour inelastic

Proportion of labour cost to total cost of production - larger proportion of labour cost to total production, the greater the elasticity of demand for labour