Demand for Labour

Question 1

What is marginal physical product (MPP), and what is its formula?

Answer 1

The change in output produced by employing one additional unit of a variable input, e.g. labour.

MPP = ΔY (change in output) ÷ ΔX (change in variable input)

Question 2

What is marginal revenue product (MRP), and what is its formula?

Answer 2

The marginal revenue created due to an addition of one unit of resource.

MRP = MPP (marginal physical product) x MR (marginal revenue)

Question 3

What is productivity?

Answer 3

A measure of how much output can be produced with a given set of inputs.

Question 4

Why is the demand for labour a derived demand?

Answer 4

Demand for labour comes from firms, with the demand varying on the demand for the goods and services that the labour produces. E.g. if demand for houses increases, so will the demand for construction workers.

Question 5

What are 2 factors influencing demand for labour?

Answer 5

1) Productivity: If productivity increases, unit labour cost falls. As long as the cost of employing the worker costs less than the MRP, it is profitable to employ more workers.
2) Price of a product: If price increases, the demand for labour will increase. Vice-versa.

Question 6

Explain the short-run demand for labour diagram (3).

Answer 6

1) The demand for labour curve is downward sloping, due to the law of diminishing marginal productivity.
2) MRP = D.
3) On the Y-axis is wage rate, and on the X-axis is labour.

Question 7

What is the elasticity of labour demand?

Answer 7

The responsiveness of the demand for labour to changes in the wage rate.

Question 8

What are the influences on the elasticity of labour demand (4)?

Answer 8

1) Time: The longer the time, the easier it is to substitute factors.
2) Elasticity of demand for the product: Demand for labour is derived from demand.
3) Availability of substitutes: When few are available, the elasticity of demand for labour will be inelastic.
4) Proportion of labour costs compared to total costs.