5. Labour Markets - Labour Demand Elasticity

Question 1

What is the elasticity of labour demand?

Answer 1

The responsiveness of labour demanded given a change in the wage rate

Question 2

What does it mean to have an elastic labour demand?

Answer 2

This means that the proportional change in labour demanded is greater than the proportional change in the wage rate. - horizontal line

Question 3

What does it mean to have an inelastic labour demand?

Answer 3

This means that the proportional change in labour demanded is less than the proportional change in the wage rate. - vertical line

Question 4

What is mnemonic to remember the 4 factors that effect elasticity of labour demand?

Answer 4

S-E-C-T

Question 5

What does SECT stand for? (What are the 4 factors that effect labour elasticity of demand?)

Answer 5

1. Substitutability of capital and labour2. Elasticity of demand for the product3. Cost of labour as a % of the total cost4. Time Period

Question 6

How does the substitutability of capital and labour effect the elasticity of demand for labour?

Answer 6

If labour can easily be substituted by capital - it is very elastic as firms can move to machines if wages rise - change in wage rate < change in labour demanded

Question 7

How does the elasticity of demand for the product effect the elasticity of demand for labour?

Answer 7

If the elasticity of demand for the final product is very inelastic firms won’t mind taking on higher wages for workers because they can pass on the higher wage costs to consumer in higher prices - & vice versa

Question 8

How does the cost of labour as a % of the total cost effect the elasticity of demand for labour?

Answer 8

If wages are a high % of the total costs then a rise in wages will see total cost shoot up massively - firms will then think they need to cut workers to cut costs - larger change in demand for workers than change in wage rate = elastic

Question 9

How does the time period effect the elasticity of labour demanded?

Answer 9

In the short-run its difficult to replace workers with capital so demand for labour is inelasticIn the long-run however all FoP’s are variable so it’s far easier to replace labour with capital - demand for labour becomes more inelastic