Demand for Labour

Question 1

Derived Demand

Answer 1

The demand for labour is dependant on the demand for the product or service
- if lots of demand, firms have to hire more workers to produce the good
- unemployment decreases

Question 2

How is it possible to have a growing economy and rising unemployment at the same time?

Answer 2

Due to capital labour substitution which replaces low-skilled workers

Question 3

Marginal Revenue Product Theory

Answer 3

The change in a firms total revenue as a result of changing employment by 1 unit
- marginal physical product of labour (productivity) x marginal revenue (price paid)

Question 4

Marginal Physical Product of Labour (productivity)

Answer 4

The change in total output as a result of changing employment by 1 unit

Question 5

What happens to the MPPL as more workers are employed?

Answer 5

• Initially when more workers are employed it is beneficial as specialisation can occur
• however may not be beneficial in the long term due to the law of diminishing returns

Question 6

Marginal Revenue

Answer 6

The change in total revenue as a result of changing output by 1 unit
- the price paid for the good

Question 7

What do we assume about MR?

Answer 7

Assume MR is constant in labour markets even if output stays the same, because assuming firms are competing in a perfectly competitive market
- even if selling additional units of output, price stays the same

Question 8

Demand curve for labour

Answer 8

• downwards sloping as when wage rates fall firms want to hire more workers
• shows how many workers will be hired at any given wage rate at a given period of time

Question 9

When do firms not want to hire workers?

Answer 9

If the additional unit of labor does not increase output by a lot

Question 10

Profit maximising level of employment
(Labour market equilibrium)

Answer 10

• MRPL = MCL
• The change in total revenue as a result of employing the last unit of labour equals the change in total costs as a result of employing the last unit of labour

Question 11

Why is Labour Market Equilibrium not reached when MRPL > MCL?

Answer 11

• The change in total revenue as a result of employing the next unit of labour is greater than the change in total costs as a result of employing the next unit of labour
• So firms make more profit by hiring an additional unit of labour

Question 12

Why is Labour Market Equilibrium not reached when MRPL < MCL?

Answer 12

• The change in total revenue as a result of employing the last unit of labour is less than the change in total costs as a result of employing the last unit of labour
• So firms make more profit by not hiring the last unit of labour

Question 13

Elasticity of Demand for Labour

Answer 13

The responsiveness of quantity demanded for labour to a change in wages
- % change in quantity demanded / % change in wage rate
- if employers are relatively sensitive to a change in the wage rate, demand will be elastic so a change in the wage rate will cause a more than proportional change in labour demand

Question 14

Factors which determine the EDL

Answer 14

1. The PED of the good produced
- If the demand for the good is inelastic, it is a necessity so if the price of the good increases demand decreases less than proportionally
- If wages increase firms won’t respond by cutting down or reducing their workforce and labor demand as they can pass on this increased cost to consumers as they will still continue to buy the good
- demand for labour decreases less than proportionally so inelastic demand for labour

2. The proportion of wage costs in total costs
- the greater the labour costs are as a percentage, the more elastic the demand for labour
- firms think that their costs have increased alot so are going to cut down their workforce which decreases the quantity of labour more than proportionally so elastic
- when workers demand a higher wage in a firm that is predominantly specialised in capital, wages are not a large component of their COP
- quantity of labour decreases less than proportionally as firms wont need to reduce costs by cutting their workforce by alot sop inelastic demand

3. The ease to which labour can be substituted by other factors
- when not easy to replace labour with capital, the elasticity of demand is inelastic
- less than proportional decrease in quantity of labour in response to an increase in wages
- if easy to replace labour with capital, the elasticity is elastic

4. The elasticity of supply of complementary factors
- when wage rates fall, firms would ideally hire alot of labour
- however, unlikely to occur and there wont be a more than proprtional increase in quantity demanded of labour as labour needs alot of things

5. Time period
- in the short term, workers can demand higher wages as they cant be replaced
- in the long term theres an increase in the quality and quantity of capital and so can replace labour C
- curve becomes more elastic over time

Question 15

Why do firms care about the cost of labour?

Answer 15

• high component of cop
• charge higher prices
• no longer price competitive

Question 16

How can a firms labour costs fall when wages are rising?

Answer 16

• workers becoming more productive
• dont need to hire more workers
• output increases

Question 17

When is labour productivity likely to be high?

Answer 17

• specialised workers
• high quality training
• lack of job security
• high quality capital

Question 18

Unit Labour Costs

Answer 18

The average cost of labour per unit of output
- total labour costs / total output

Question 19

Why are unit labor costs relatively high in the UK?

Answer 19

• national minimum wage
• welfare state and strong employment protection
• cost of living is high
• tax