Demand and Supply for Labour

Question 1

Define a Firm

Answer 1

An organisation that brings together factors of production in order to produce output

Question 2

What type of demand is the demand for labour

Answer 2

Derived Demand

Question 3

Why is the pattern of labour markets likely to evolve over time

Answer 3

Technology changes - which brings the need for different skills and a different balance of skills

Question 4

What is the price of labour referred to as

Answer 4

The wage rate or salary

Question 5

What happens when the price of labour lowers

Answer 5

The greater demand will be

Question 6

What factors can shift the demand curve for labour

Answer 6

Changes in the productivity of labour

Changes in the price of the good labour produces

Changes in the demand of the good labour produces

Changes in the price of capital

Question 7

What is the shape of the labour demand curve

Answer 7

Downward sloping

Question 8

What causes movements along the demand curve for labour

Answer 8

Changes in the wage rate

Question 9

What is the effects of an increase in the wage rate paid to workers in an industry

Answer 9

Attract more workers in an industry - increasing labour supply

May affect the supply decision of workers already in the market

Question 10

What is the effect of an increase in the opportunity cost of leisure due to an increase in the wage rate

Answer 10

Substitution effect of leisure - now more costly - workers will be more motivated to work harder

Higher wage brings higher real incomes - encourages consumption of goods and services including leisure

These effects work against each other

Question 11

What is the shape of the individual labour supply curve

Answer 11

Backwards bending

Question 12

Why is the individual labour supply curve backwards bending

Answer 12

At relatively low wages - substitution effect will be stronger

As wages rise - income effect may gradually become stronger - worker will choose to supply less labour and will demand more leisure

As increase in the wage rate above bending point - supply fewer hours of work in order to enjoy more leisure time

Question 13

What may influence decisions about labour supply

Answer 13

Job satisfaction - may be prepared to accept lower wage if they feel satisfied with their job

Fringe benefits

Question 14

Shape of labour supply curve for a market

Answer 14

Upward sloping

Question 15

Why is the labour supply curve sloping upwards

Answer 15

More people will tend to offer themselves for work when the wage is relatively high

People join the market at a higher wage rate either from outside of the workforce or from other industries where wages have not been risen

Question 16

To who do wages act as a signal to

Answer 16

To workers about which industries are offering the best returns to work

Price mechanism does this

Question 17

Which factors influence the position of the labour supply curve

Answer 17

Size of the working age population - higher the size of the working age population, higher the participation rate, greater the industry supply curve

Wages on offer in substitute occupations - if wages in a substitute occupation increases, inward shift of the labour supply curve

Barriers to Entry - some jobs have minimum entry requirements or qualification - higher the barrier, the less people able to work

Non-monetary benefits - greater the benefits, more people willing to work

Overtime - allows them to increase their income

Question 18

What happens when wage rate is lower than the equilibrium wage rate

Answer 18

Employers will not be able to fill all their vacancies - will have to offer a higher wage to attract more wages

Question 19

What happens the wage rate is higher than equilibrium wage rate

Answer 19

Excess supply of labour - wage rate will drift down until it reaches equilibrium wage

Question 20

What do higher wages do to the demand for labour

Answer 20

Encourages workers to switch from other industries in which wages have not risen

Leads to a longer term shift to the right of the labour supply curve

In a free market, shift will continue until wage differentials are no longer sufficient to encourage workers to transfer