6.1 The Demand For Labour, Marginal Productivity Theory

Question 1

What is the labour market?

Answer 1

• The labour market is a factor market.
• The supply of labour is determined by those who want to be employed (the employees), whilst the demand for labour is from employers.
• Labour is a derived demand.
  -This means that the demand for labour comes from the demand for what it produces
• Demand is related to how productive labour is and how much the product is
  demanded.
  -The elasticity of demand for labour is linked to how price elastic the demand for the product is.

Question 2

What factors will lead to movements along the supply and demand curves for labour?

Answer 2

• The wage rate
• all other factors will shift the curves

Question 3

What factors affect the demand for labour?

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Answer 3

• the wage rate
• demand for products
• productivity of labour
• substitutes for labour
• how profitable the firm is
• the number of firms in the market

Question 4

Factors affecting the demand for labour-wage rate

Answer 4

• The downward sloping demand curve shows the inverse relationship
  between how much the worker is paid and the number of workers employed.
• When wages get higher, firms might consider switching production to capital,
  which might be cheaper and more productive than labour.

Question 5

Factors affecting the demand for labour-demand For products

Answer 5

• Since the demand for labour is derived from the demand for products, the
  higher the demand for the products, the higher the demand for labour.

Question 6

Factors affecting the demand for labour-the productivity of labour

Answer 6

• The more productive workers are, the higher the demand for them.
• This can be increased with education and training, and by using technology.

Question 7

Factors affecting the demand for labour-substitutes For labour

Answer 7

• If labour can be replaced for cheaper capital, then the demand for labour will
  fall.
  -This will shift the demand curve for labour to the left

Question 8

Factors affecting the demand for labour-how profitable the firm is

Answer 8

• The higher the profits of the firm, the more labour they can afford to employ.

Question 9

Factors affecting the demand for labour-the number of firms in the market

Answer 9

• This determines how many buyers of labour there is.
• If there is only one employer, for example the NHS, the demand for labour is lower than if there are many employers, such as in the supermarket industry.
• The lower demand for labour can mean wages are lower, so trade unions try
  to encourage higher wages.

Question 10

What is the marginal productivity theory of the demand for labour?

Answer 10

• This theory states that the demand for labour is dependent on the marginal revenue product (MRP)
• MRP is calculated by marginal product multiplied by marginal revenue.
  MRP = MP x MR.
• The marginal product of labour is the additional output each unit of labour can
  produce.
• The marginal revenue of labour is the additional revenue derived per extra unit of labour.
• Equilibrium occurs where the marginal cost of one extra unit of labour is equal to the net benefit of one extra unit of labour.

-The demand curve shows the MRP.

Question 11

What are the determinants of the elasticity of demand for labour?

Answer 11

• The wage rate and level of employment is affected by shifting the demand or supply curve differently, depending on how elastic the other curve is.
• If labour demand is inelastic, because there are few or no substitutes, strikes will
  increase the wage rate but not affect the employment rate significantly.
• Where there is an inelastic demand for labour, a lower supply will lead to a higher increase in the wage rate than where there is a more elastic demand

Question 12

What does the elasticity of demand for labour measure and what is it affected by?

Answer 12

• measures how responsive the demand for labour is when the market wage rate changes.
• This is affected by:
• How much labour costs as a proportion of total costs.
  -The higher the cost of labour as a proportion of total costs, the more elastic the demand.
• The easier it is to substitute factors, the more elastic the demand for labour,
  because firms can easily to switch to cheaper forms of production, such as capital.
• The PED of the product also affects labour.
  -The more price elastic the product, the more price elastic the demand for labour.