5.1 Demand For Labour Flashcards
Explain Derived Demand for Labour
The demand for labour is determined by the demand for the good or service they will be producing
Explain how the productivity of workers will affect the Demand for Labour in an Industry
The more productive the workers will be, the more demand there will be.
Law of diminishing returns states that if you hire too many workers, there will be a reduction in productivity.
Explain how the wage rate will affect the Demand for Labour in an industry.
An increase in the wage rate (usually cause by an increase in minimum wage) can cause firms to switch to capital based production
Explain how the demand for products will affect the demand for labour in an industry.
Since demand for labour is derived demand based upon the demand for products, if the demand for products increases, so does the demand for labour & Vice versa.
Explain how substitutes for labour will affect the demand for labour in an industry.
If capital investment will be more affordable & suitable in the long term, firms may opt towards this instead and make workers redundant.
Explain how the profitability of the firm will affect the demand for labour in an industry.
If the firm is seeing an increase in profits, they may choose to hire more staff in order to reach profit maximisation.
If they are beginning to lose money or decrease their profits, they may choose to make workers redundant.
Explain how the competitiveness of the market will affect the demand for labour in an industry.
If there are lots of firms in the market, there will be a high demand for labour, this will also lead to an increase in the wage rate in order to incentivise workers to join their firm.
If there are a small amount of firms in the market, there will be a lower demand for labour, this will also lead to a decrease in the wage rate as they dont need to incentivise workers to join.
Define the wage elasticity of demand and its formula.
Measures how responsive / sensitive the demand for labour is to a change in the wage rate
%△Demand for labour = WED
%△Wage Rate
Explain how the proportion of labour costs to total costs will affect WED
If the proportion of labour costs to total costs start to increase (increase in labour costs and other costs remain same or decrease) , then WED will become more elastic
Explain how substitution of factors can affect WED
If it is easier for a firm to substitute labour for capital then WED becomes more elastic.
If it is more challenging for a firm to implement capital rather than labour then WED becomes more inelastic
Explain how the PED of the product can affect the WED
An increase in PED will lead to a more elastic WED since production needs will change in accordance to demand of the product.
Explain Productivity
Productivity is calculated by the output of the worker over a given time period.
To increase productivity you can increase training schemes or invest in better machinery.
Explain Unit Labour Costs
How much labour costs per unit of output produced.
The more productive a country becomes at manufacturing, the lower the unit labour costs.
If a country has cheaper unit labour costs, they will be more competitive in manufacturing goods (China, India).
The way that countries like the US and the UK compete is through higher quality, more expensive products.
Explain Marginal Revenue Product theory in relation to Employment and Wage Determination.
MRP is the additional revenue a company makes by producing one extra unit.
Used for determining whether a firm should add more workers & capital.
The higher the MRP the more valuable the worker is since they will generate more revenue for the firm. This will lead to a higher wage and a higher demand for productive workers.
MRP = Marginal Product (MP) * Price (P)
