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A Level Economics > 6. The Labour Market > Flashcards

6. The Labour Market Flashcards

1
Q

What is derived demand?

A

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

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2
Q

How is labour a derived demand?

A

Firms demand labour only if profits can be increased by employing more workers

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3
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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4
Q

What is marginal revenue product ?

A

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

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5
Q

Equation for marginal revenue product

A

Marginal revenue product of labour = marginal physical product X marginal revenue

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6
Q

What is MRP curve explained by in a perfectly competitive market?

A

The law of diminishing returns

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7
Q

What does the demand curve for labour show?

A

Relationship between the wage rate and number of workers employed

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8
Q

What does a lower wage rate mean?

A

Employers within a labour market will be willing to take on more people to hire

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9
Q

What would cause a shift in the demand curve for labour?

A
  • a change in labour productivity - more productive = greater demand
  • a change In technology - if technological progress makes labour more productive relative to other factors of production, firms are likely to substitute labour for other factors. However technical progress can have the opposite effect by causing firms to substitute capital for laboru
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10
Q

What is the elasticity of demand for labour?

A

Proportion change in demand for labour following a change in wage rate

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11
Q

Reasons for labour inelasticity

A
  • when the wage cost forms only a small part of production
  • when the demand for the good or service being produced by the labour is inelastic
  • when it is difficult to substitute the labour for other factors of production or other types of labour
  • in the short run as it takes time for employers to adjust the method of production
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12
Q

What does the market supply curve of labour show?

A

How much labour all the workers in the labour market plan to supply at different wage rates

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13
Q

What are the two factors which influence the amount of labour that workers are willing to supply?

A
  • Monetary : wage rates
  • non - monetary : job satisfaction
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14
Q

What happens as more labour time is supplied?

A

The extra income yields less and less extra satisfaction for the worker

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15
Q

To maximise personal welfare, up to which point must a worker supply

A

Where the utility of welfare from the last unit of money earned = utility or welfare from the last unit of leisure time sacrificed.
There is no incentive for the worker to supply more labour once this is reached

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16
Q

How does a higher hourly wage rate impact the supply of labour?

A
  • provides an incentive to work more hours
  • the welfare derived from the wage becomes greater than the welfare derived from leisure time
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17
Q

How can changes in the non-monetary factors affect the supply of labour?

A

People will decide they value leisure time more highly and so they will work fewer hours at each wage rate

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18
Q

Non monetary factors

A

Benefits of job security
Promotion prospects
Good working conditions
Holiday entitlement

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19
Q

How can a change in income shift the supply curve of labour?

A
  • leisure time is a normal good so a rise a rise in income increases the demand for leisure which in turn causes the the curve to shift to the left
  • for some leisure time is an inferior good, higher income reduces their demand for leisure
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20
Q

How can a change in the population shift the supply curve of labour ?

A
  • a rise in population increases the supply of labour
  • a fall in the number of people of working age causes the labour supply curve to shift to the left
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21
Q

How can a change in expectations affect the supply of labour?

A
  • if older people live longer and become less optimistic about their pensions they may decide to work longer
  • a rise in the proportion of people staying on in education reduces the supply of labour
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22
Q

What is the elasticity of supply of labour?

A

The change in the supply of labour following a change in wage rate

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23
Q

What are the factors which determine the elasticity of supply of labour?

A
  • supply of unskilled labour is usually more elastic than the supply of skilled labour. This is because the training period for unskilled is labour is usually very short.
  • factors which reduce the occupational and geographical mobility of labour reduces the elasticity
  • more elastic in the long run than short run
  • availability of a pool of unemployed labour increases the elasticity
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24
Q

What must a perfectly competitive labour market contain?

A
  • A large number of buyers and sellers each unable to influence the ruling wage rate and operating in conditions of perfect market information .
  • Employers and workers would be free to enter the labour market in the long run but an employer could not influence the ruling market wage through independent action
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25
Q

How the ruling market wage affects perfectly competitive firms?

A

Each employer would face a perfectly elastic supply of labour curve. The firm could buy as much labour as it wanted at the ruling market wage.

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26
Q

What is the average cost of labour?

A

Total wage costs divided by the number of workers employed

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27
Q

What is the marginal cost of labour?

A

The addition to a firms total cost of production resulting from employing one more worker.

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28
Q

Why does the employer have to accept the ruling market wage?

A

They would passively accept the ruling market wage as it is determined by the perfectly elastic supply curve each firm is facing

29
Q

What is the point at which a firm would demand labour up to maximise profit when selling an output produce by labour?

A

The addition to sales revenue from employing one extra worker = the addition to production costs resulting from the employment of an extra worker.
Or
MRP=MC

30
Q

What is the marginal revenue product of labour?

A

The marginal benefit accruing to the employer when hiring an extra worker

31
Q

What would happen if the firm were to employ another worker once MRP=MC?

A

Additional workers would add more to total costs of production than to total revenue

32
Q

What would happen if the firm is employing below where MRP=MC?

A

More workers should be employed

33
Q

What should happen if the firm is employing at above where MRP=MC?

A

Fewer workers should be employed

34
Q

What does it mean when MRP = MC ?

A

The firm is employing enough workers consistent for profit maximisation

35
Q

Why is each worker a passive wage taker in a perfectly competitive labour market?

A

Market forces operating in the whole labour market establish the ruling market wage

36
Q

How is the ‘law of one price’ referred to the labour market?

A

If labour markets were perfectly competitive and in equilibrium, workers with the same skills and performing the same tasks would be paid at the same wage rates

37
Q

What is a monopsony ?

A

Only one buyer in a market

38
Q

What is monopsony power ?

A

The market power exercised in a market by the buyer of a good or the services of a factor of production such as labour even though the firm is not a pure monopolist

39
Q

Closest example to a monopsonistic labour market

A

The armed forces

40
Q

What does monopsony power refer to?

A

A situation where there are dominant employers but not pure monopsony

41
Q

Example of a firm using monopsony power

A

NHS as the existence of private hospital show that the NHS is not a pure monopsony

42
Q

What factors contributes to the imperfection of labour markets?

A

Monopsony power, trade union and imperfect information

43
Q

What is the market supply curve in a monopsonistic labour market?

A

The firms average cost of labour curve

44
Q

What does the average cost curve of labour show to a monopsonistic labour market?

A

The different wage rates that the monopsony must pay to attract labour forces of different sizes.

45
Q

Why is the average cost curve not the marginal cost curve in a monopsony?

A
  • to attract an extra worker, the monopsony must raise the hourly wage rates
  • in this situation, the marginal cost of labour incurred by an extra worker is the change in the total amount by which the wage bill rises not just the wage rate paid to an extra worker
46
Q

Where is the monopsonists level of employment determined?

A

Where MRP=MC

47
Q

Where is the monopsony wage rate determined?

A

Below where MC=MRP where it meets the supply curve

48
Q

Why is the monopsony wage rate less than the MRP of labour?

A

Workers are willing to work for an hourly wage rate below there MRP.

49
Q

What are the five reasons for wage differences?

A
  • Disequilibrium trading
  • Imperfect market information
  • Occupational immobility of labour
  • Geographical immobility of labour
  • Discrimination
50
Q

What is disequilibrium trading?

A

Because market conditions are always changing, labour markets are usually in disequilibrium . Although market forces tend to equalise wages in competitive labour markets , disparities exist which reflect disequilibrium conditions

51
Q

What is imperfect market information?

A

Workers sometimes lack accurate information in rates of pay .
Employers sometimes lack information about wage rates in other labour markets.

52
Q

What is the occupational immobility of labour?

A

When workers are unwilling or unable to move from one type of job to another because of different skills needed which lead to prevention by natural or artificial barriers.

53
Q

What is the geographical immobility of labour?

A

When workers are unwilling or unable to move from one area to another in search of work. Most significant cause is the housing market.

54
Q

How can discrimination lead to wage differences?

A

Differences in race, religion, age and gender affect both demand and supply . It affects the demand side as employers may be unwilling to employ certain types of labour. On the supply side, workers may refuse to work alongside other workers who are perceived differently.

55
Q

What is a trade union?

A

A group of workers who join together to maintain and improve their conditions of employment

56
Q

What is collective bargaining?

A

A process by which wage rates and other conditions of work are negotiated and agreed upon by a union or unions with an employer

57
Q

Why are trade unions a monopoly supplier of labour?

A

They are able to keep non-members out of the labour market and prevent its members from supplying labour at below the union wage rate

58
Q

What factors are responsible for the power shifting away from trade unions?

A
  • a series of employment acts which have restricted the legal rights of trade unions
  • impact of globalisation and international competition upon British labour markets
59
Q

Why does the London transport trade union remain powerful?

A

It is protected from international competition

60
Q

Significance of the decline of collective bargaining in the UK

A

Means that more wages are employer determined or on a take it or leave it basis

61
Q

Possible effects of workers organising a trade union in perfectly competitive labour market

A
  • the market would become imperfect
  • higher minimum wage rate
  • excess supply of labour as more people are willing to work at this wage rate
62
Q

Why should trade unions accept pay cuts?

A

Raising wages leads to less jobs so if unions are interested in reducing unemployment, they should accept pay cuts.

63
Q

Why do Keynesian economists dispute that unions should accept wage cuts?

A

Believe that technical progress can ensure that the MRP curve of labour shifts to the right. Increased productivity creates scope for both increased wages and increased employment. Higher wages may encourage firms to adopt improvements in productivity to pay for higher wages.

64
Q

How can both employment and wages increase when union negotiates for higher wages?

A

In an expanding goods market , increased demand for output creates increased demand for labour. Rising wages in the economy lead to a greater demand of the good.

65
Q

What are the two ways a trade union can try to increase wages?

A
  • prevent members supplying labour at below the union wage rate
  • closed shop, keeping non-union members from the labour market which leads to inelasticity
66
Q

What is the effect of introducing a trade union into a monopsony labour market

A

Raise both wages and employment even without the MRP shifting right

67
Q

What is a national minimum wage?

A

A wage rate that must be paid by law to employees

68
Q

Advantages of a national minimum wage

A

Reduces exploitation by employers

A Level Economics (7 decks)

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