Chapter 1.4 - Applications of Supply & Demand Analysis

Question 0

Identify and explain the 2 types of indirect taxes.

Answer 0

1. Ad valorem taxes are a % of the price of a product and will cause the supply curve to shift inwards and become steeper than the original.
2. Specific taxes are a set amount per unit of the product and will cause the supply curve to shift inwards, parallel to the original curve.

Question 1

Define ‘indirect taxes’.

Answer 1

Indirect taxes are taxes on expenditure e.g. VAT, excise taxes and taxes on gambling.
Such taxes cause an increase in the cost of supply and so cause the supply curve to shift inwards.

Question 2

Define ‘subsidies’.

Answer 2

Subsidies are grants from the government which reduces the costs of production, shifting the supply curve outwards.

Question 3

What is the wage rate?

Answer 3

The wage rate is the amount paid per hour/day/week/month for working.

Question 4

Define ‘derived demand’.

Answer 4

Derived demand is demand which is dependant on the demand for the final product.
Typically, the demand curve for labour will be downward sloping because, as the real wage rate decreases, it becomes more attractive for firms to employ workers.

Question 5

What are the 3 influencing factors of the elasticity of demand for labour to a particular industry?

Answer 5

1. The elasticity of demand for the final product.
2. The proportion of total costs accounted for by wage costs - if wage costs are a very high proportion of total cost then demand for labour will tend to be elastic.
3. The ease/difficulty of replacing labour with machinery - if labour cannot easily be replaced with capital then demand for labour will tend to be inelastic.

Question 6

What are the 5 influencing factors of the demand for labour to a particular industry?

Answer 6

1. The demand for the final product.
2. The relative price of capital and other factors - if labour costs rise relative to the cost of machinery, firms are likely to replace labour with capital e.g. the cost of employing workers might be affected by changes in employers’ national insurance contributions.
3. The productivity of labour - a decrease in labour productivity would cause a reduction in the demand for labour.
4. The price of the product - a higher price would encourage firms to increase their demand for labour.
5. Labour market regulations - if employment protection laws are increased, making it more difficult to hire and fire workers, demand for labour is likely to fall.

If any of these factors change then the whole demand curve will shift.

Question 7

What does the overall supply of labour depend on?

Answer 7

The overall supply of labour depends on the size of the working population.

Question 9

What are the 2 influencing factors of the elasticity of supply to a particular industry?

Answer 9

1. Skills, qualifications and experience required - if these are high then the supply of labour will tend to be inelastic.
2. Level of unemployment in the economy - if unemployment is high then supply is likely to be more elastic.

Question 10

State and explain 6 factors that will cause a shift in the supply curve for labour in a particular industry.

Answer 10

1. Net migration - a rise in immigration relative to emigration would cause an outward shift in the supply curve.
2. The real wage in other occupations - e.g. a rise in real wages of engineers relative to other occupations would result in an increase in the supply of workers into the engineering industry.
3. Non-monetary factors such as job satisfaction, job security, prospects of promotion, hours of work and holidays, private healthcare insurance and pension rights.
4. Income tax rates - e.g. a reduction in income tax rates might encourage more people who are currently inactive to seek employment.
5. Qualifications and legal requirements - if there is a new requirement for all entrants into an industry to be graduates then this is likely to decrease the supply of labour.
6. Childcare facilities and cost - an improvement in childcare facilities at a lower cost is likely to result in an increased supply of labour, especially women.

Question 11

Define ‘National Minimum Wage (NMW)’.

Answer 11

The NMW is a rate set by the government to specify the lowest legal amount that workers can be paid.

Question 12

What is the main aim of the NMW?

Answer 12

The main aim of the NMW is to prevent the exploitation of workers and to reduce inequality.

Question 13

What are the 3 factors affecting the amount of unemployment in an industry?

Answer 13

1. How high the NMW is relative to the equilibrium wage.
2. The PED for labour.
3. The PES for labour.

Question 14

What does the supply curve for labour show?

Answer 14

The supply curve for labour shows how many people are willing to work at given wage rates.
The supply curve will be upward sloping because, as real wages rise, there is more incentive for workers to transfer from other industries or for the unemployed to accept jobs or for those who are currently inactive to seek employment.