6.1 The demand for labour Flashcards
We say that the roles of houses and firms function simultaneously but their roles are reversed in both the goods market & labour market. Why do we say this? Explain.
a) In the GOODS market, firms are a source of supply
b) In the FACTOR market (these are resources firms must employ in order to produce goods and services - factors of production CELL), households are the suppliers.
The incomes recieved by households from the sale and supply of their labour/factor services contributes a large proportion of the household’s ability to WHAT - that is supplied by firm in the GOODS market. Income allows households to do WHAT? WHat is ‘demand’? In order to earn income, households must do WHAT?
a) INCOME
b) Income allows households to EXCERCISE demand. Demand is defined as the consumer’s ability and willigness to pay for a good or service. Therefore, in order for households to earn income they must sell their labour services in a labour market.
The relationship between households and firms is essentially WHAT?
HINT: In a goods market, finished products and services FLOW from the firms TO households. HOuseholds spend thier incomes on the goods. In the labour market, members of househlds sell their labour to their employers which allows them to earn income that will enable them to excercise demand as a result. Therefore, this relationship is essenially…
a) Circular
Define the term ‘derived demand’. Give an example to solidify your idea of ‘derived demand’.
a) Derived demand - Demand for a good/service or factor of production, not for its own sake , but as a consequence of the demand for something else. E.g: If you demand for a dental service you are therefore demanding for a dentists, not because you want them specifically but because you want the service they can provide.
Firms demand labour only if profits can be made. But this is based on the assumption that houselholds in the goods markets demand the goods and services that workers from the firm are producing. This means that a firm’s demand for labour is WHAT (i.e. a firms demand for labour derives from the demand for the firm’s goods or services.
a) This means that a firm’s demand is a derived demand.
Assuming we a firm has a profit maximising objective, the firm cannot demand labour in the long-run unless they can sell the outputs they make for at least WHAT type of profit in the goods market?
a) They must be able to sell their labour for atleast NORMAL profit in the long-run.
Now we shall look at ‘marginal productivity theory’ & the ‘demand for labour’. To understand a firm’s demand curve for LABOUR, we must explain the term ‘marginal physical product of labour’ (MPPL). What is MPPL? WHAT is ‘productivity’?
Marginal physical productivity of labour - is just another term for marginal returns of labour. MPPL measures the amount by which a firm’s total output rises in the SR, as a result of employing 1 more worker.
We must remember that in the SR the law of diminshing returns or diminishing marginal productivity can occur as a firm employs more labour. The law of diminishing returns is a key concept in the SR due to capital being fixed. A diagram can show that as you add more and more workers in the SR after a certain point, the law of diminishing returns kicks in and each additional worker shall reduce total output of a firm - i.e procutivity decreases (productivity is the number of outputs recieved in relation to the number inputs applied by a firm).
Now we shall discuss ‘marginal revenue product of labour’. Define the term. Does the MRPL curve slop up or down? How do we convert from marginal physical product of labour to marginal revenue product of labour?
a) MRPL - this is defined as the money value of the addition to a firms’s total output by adding/employing one more worker. MPPL x MR = MRPL !
b) The MRPL curve slopes downwards. y-axis = wage rate & x-axis = no. of workers
c) To convert from MPPL to MRPL we must times MPP of labour by the marginal revenue, which is the monetary addition of the firm’s total revenue. In perfect comp. goods & labour makret the MR is the same as the good or service’s price! This means that you can find the MRPL by multiplying the price of the good or service by the MPPL.
What does the demand curve for labour showcase? Think about the slope of the demand curve and the y and x axis.
a) The slope of the MRPL curve is negative (sloping downwards). The y-axis highlights the wage rate and the x-axis highlights the no. of workers. The negative gradient means that as wage rate decreases the no. of workers the firm demands for increases!
Now we shall pay attention to the causes that shift a firm’s demand curve for labour to the right (meaning increased demand) or to the left (meaning decreased demand). State the 3 possible reasons for a shift in the demand curve for labour (in general).
a) Change in labour productivity.
b) Change in technology.
c) Elasticity of the demand for labour.
A firm’s demand curve for labour is the MRPL curve - marginal revenue, product of labour (MRPL). If labour productivity increases, will demand for labour rise or fall? What about if marginal revenue increases? If we remember that the demand for labour is ‘derived demand’ then an increase in demand for a good or service by consumers to a firm shall cause the firm to demand more or less labour - therefore which way shall the curve shift?
a) Demand shall rise.
b) Demand shall rise.
c) There shall be more demand causing a rightward shift of the firm’s labour demand curve.
Changes in technology can also impact demand for labour. If technical progress makes labour more productive firms are likely to substitute labour for other factors of production causing a WHAT? Technical progress shall also improve productive and dynamic efficiency. This can allow for the reduction of prices and therefore a rise in the demand recieved by a firm for its good or service meaning the firm therefore does WHAT in the labour market? This is called WHAT?
a) Rightward shift in the demand curve.
b) Demands more labour. This is called derived demand.
We’ve spoken about the demand for labour shifting to the right as a result of technical progress. However, the opposite is also possible. What can firms do to labour due as a result of technical progress? Give an example.
a) Firms can SUBSTITUE. They can use capital instead of labour! E.g. Capital such as machines that can automate methods of production and reduce costs in the LR mean that productivity increases relative to the productivity of the labour applied to the same task. In this case the firm shall therefore demand less labour and employ more automated machinery/capital. Therefore, a leftward shift in demand is witnessed.
The elasticity of the demand for labour. Define what is meant by the previous sentence. When is demand for labour relatively inelastic? Give 2 cases.
a) The elasticity of the demand for labour measures the proportion to which demand for labour changes following a change/alteration in wage rate.
b) In the SR when a firm cannot change/adjust its method of production.
c) When it’s difficult to substitue other factors of production such as capital for the labour currently being employed.
