Chapter 12 - Factor Markets: Labour

Question 1

Labour is a costly factor of production. The cost of labour is the largest cost factor in the economy. How can one ensure that higher salary demands do not have a negative effect?

Answer 1

Productivity must be increased

Question 2

Which 2 forces is responsible for the backward-bending in the labour supply curve?

Answer 2

The substitution effect and the income effect.

Question 3

What is the substitution effect in labour?

Answer 3

The higher the wage rate, the more hours people are prepared to work to get a higher income for goods and services. They are sacrificing leisure time. The higher wage rate therefore increases the opportunity cost of leisure - work is substituted for leisure.

Question 4

What type of good is leisure seen as?

Answer 4

A normal good. Demand for normal goods increase as income increases.

Question 5

What is the income effect?

Answer 5

Leisure is seen as a normal good. The demand for normal goods increase as income increase. Therefore as the worker’s income increase the demand for leisure will increase.

Question 6

Who supplies labour?

Answer 6

Households

Question 7

When will the market supply of labour for a particular type of labour change?

Answer 7

When any of the non-wage determinants of the supply of labour change. This will cause a shift in the market supply curve.

Question 8

Give 4 possible reasons for the market supply of labour to change (shift)

Answer 8

• new workers enter the market (eg population increase)
• number of workers decrease ( eg due to HIV)
• wages in other occupations change (making them more or less attractive)
• non-monetary aspects change (eg job becomes less dangerous)

Question 9

In deciding whether more workers should be employed, which factors do the firm compare?

Answer 9

The firm compare the Marginal Benefit derived from employing the worker with the Marginal Cost of employing the worker. As long as the Marginal Benefit exceeds the Marginal Cost more workers can be employed.

Question 10

At what point must the firm stop employing more workers?

Answer 10

When Marginal Benefit is equal to Marginal Cost

Question 11

When are participants of the labour market Wage Takers?

Answer 11

When the wage rate is determined by the demand for and supply of labour in the market. No individual participant can influence the wage rate.

Question 12

Which 2 factors determine marginal benefit to a firm to employ additional units of labour?

Answer 12

Physical productivity of labour and the marginal revenue (in monetary means)

Question 13

What is Marginal Revenue?

Answer 13

The additional revenue that a firm earns when it sells an additional unit of its product.

Question 14

What is MPP in labour?

Answer 14

Marginal physical product of labour

Question 15

What does MPP represent?

Answer 15

Indicates the physical value to the firm of employing an additional unit of labour?

Question 16

How is Marginal Revenue Product calculated?

Answer 16

Physical value (MPP) multiplied by the Marginal Revenue (MR)
MRP = MPP x MR

Question 17

When is a firm perfectly competitive ?

Answer 17

When Marginal Revenue (MR) is equal to Price of the product (P)

Question 18

What is the result of a firm being in Equilibrium ?

Answer 18

Profits are maximised

Question 19

When is Equilibrium (max profits) achieved?

Answer 19

When MRP is equal to the wage rate
ie. Marginal Benefit = Marginal Cost
MRP = w (wage rate)

Question 20

Demand for labour derives from …

Answer 20

Demand

Question 21

In a perfectly competitive goods market MR = P
Therefore MRP = VMP
What is the relation of MR to P in Imperfect Competition?

Answer 21

Marginal Revenue will be lower than Price (since Prices have to be lowered to increase sales) This results in fewer employees being employed - Ceteris paribus

Question 22

Give 6 possible reasons why market demand for labour can change. (Shift in curve)

Answer 22

1) number of firms change (employers)
2) price of product change
3) when productivity change (MPP)
4) new substitute for labour (machines)
5) change in price of a substitute factor of production (cheaper machines)
6) price of a complementary factor of production change (eg. Price of trucks decrease, buying more trucks means more drivers are needed)

Question 23

On what does the magnitude of the changes in the wage rate and levels of employment depend on?

Answer 23

The elasticities of demand & supply

Question 24

Is the labour market completely flexible or inflexible?

Answer 24

Flexible

Question 25

List 6 possible reasons why the labour market tends to be imperfect.

Answer 25

1) trade unions - monopolistic supplier of labour
2) only 1 buyer of labourt (monopsony)
3) labour is heterogenous
4) labour is not completely mobile
5) government intervention (legislation)
6) imperfect knowledge ( by employees and employers)

Question 26

What points are typically referenced in the labour negotiation process?

Answer 26

1) what other workers are getting
2) changes in the cost of living
3) the employer’s ability to pay
4) productivity

Question 27

Which 10 issues determine the bargaining strength of parties?
WHEN PETER WANTS NICE PEANUTS ULRICH UNPACKS MORE CRAZY GRAPES

Answer 27

1) wage cost to total cost (WHEN)
2) productivity (PETER)
3) wages paid elsewhere (WANTS)
4) nature of the product (NICE)
5) price elasticity of the product (PEANUTS)
6) union control over labour supply (ULRICH)
7) unemployment (UNPACKS)
8) machinery readily to replace workers (MORE)
9) cost of living (CRAZY)
10) goods market structure (GRAPES)

Question 28

What 4 benefits do the setting of minimum wages have?

Answer 28

1) protects workers against exploitation
2) min wage may shock inefficient employers into using labour more efficiently
3) min wage raise the demand for basic consumer goods & services
4) this stimulates production, income & employment

Question 29

What 3 disadvantages may setting minimum wages have?

Answer 29

1) raise costs of production
2) these costs are passed on to consumers
3) this may result in a drop of demand - unemployment