Demand for labour Flashcards
Who creates demand for labour
Businesses and the government that employ people
Demand for labour and market wage rate
There is usually an inverse relationship as if the wage rate is high, it is more costly for businesses to hire extra employees. When wages are lower, labour becomes relatively cheaper than capital. This might create a substitution effect between capital and labour and an expansion in labour demand.
Derived demand for labour
Demand for labour is derived demand because it isnt direct or primary demand, but is derived from the demand of goods and services that labour produces.
Consumer demand - Demand for labour
If consumer demand for a particular product increases, firms will need to hire more workers to produce that product and vice versa.
What causes a shift in labour demand for an industry
-A change in price of the product
-An change in productivity of labour making labour more or less cost efficient than capital
-Employment subsidy that cuts labour costs and employ more workers
-A change in the cost of capital equipment (a substitute for labour)
The demand curve for labour
Tells us how many workers are demanded and a business will employ at a given wage rate. The demand curve for labour comes from the estimated marginal revenue product of labour
MRPL
Marginal revenue product of labour is the extra revenue generated when an additional worker is employed.
MRPL=marginal product of labour x marginal revenue
Firms in relation to MRPL
Firms are profit maximisers and they will choose a level of employment that maximises profit. MRPL falls when diminishing returns sets in. A profit maximising firm should employ workers up to the point where MRPL=Marginal cost of labour
Labour demand curve
-Downwards sloping
-As wages rise, the demand for workers fall as it costs more to hire extra workers
-Contraction of labour demand depends on elasticity of labour demand
