4.1.6.1 The demand for labour, marginal productivity theory

Question 2

Why is labour demand considered a ‘derived demand’?

Answer 2

Labour demand stems from demand for the final product (e.g., demand for car workers depends on demand for cars).

No product demand → no labour demand.

Question 3

What is the marginal productivity theory of labour demand?

Answer 3

Firms demand labour up to where MRP = MC of labour (wage).

MRP = MP (marginal product) × MR (marginal revenue).

Question 4

What does the labour demand curve show?

Answer 4

Inverse relationship between wage rate and workers employed.

Downward sloping due to diminishing marginal returns.

Question 5

What factors shift the labour demand curve?

Answer 5

Product demand ↑ → labour demand ↑.
Labour productivity ↑ → demand ↑ (e.g., training/tech).
Substitute capital becomes cheaper → demand ↓.
Firm profits ↑ → can hire more workers.

Question 6

What determines elasticity of labour demand?

Answer 6

Labour cost % of total costs: Higher % → more elastic.
Ease of substitution: Easier to replace with capital → more elastic.
PED of product: More price elastic product → more elastic labour demand.

Question 7

How is MRP calculated? Provide an example.

Answer 7

MRP = MP × MR.

Example: If hiring 1 more worker produces 10 units (MP) sold at £5 each (MR), MRP = £50.

Question 8

Where is equilibrium in the labour market?

Answer 8

Wage rate = MRP (firms hire until MRP = cost of labour).

Question 9

How do trade unions affect wages/employment?

Answer 9

Inelastic labour demand: Unions raise wages without big employment falls (few substitutes).
Elastic demand: Wage hikes lead to larger job losses.

Question 10

How does capital substitution impact labour demand?

Answer 10

If machines are cheaper/more productive → labour demand shifts left.

Example: Automation in manufacturing.

Question 11

Draw and label a labour demand/supply diagram.

Answer 11

Demand (MRP): Downward sloping.
Supply: Upward sloping.
Equilibrium: Wage (W₀) and employment (L₀) at intersection.

Question 12

Why is labour demand more elastic in services?

Answer 12

High labour cost % of total costs (e.g., hairdressing) → firms cut jobs if wages rise.

Question 13

Compare labour demand in monopsony vs. competition.

Answer 13

Monopsony (e.g., NHS): Single employer → lower demand, lower wages.
Competition (e.g., retail): Many employers → higher demand, competitive wages.

Question 14

How does productivity growth affect wages?

Answer 14

Higher productivity → higher MRP → labour demand shifts right → wages ↑.

Question 15

Give an example of derived demand for labour.

Answer 15

Netflix’s demand for scriptwriters depends on demand for streaming content.