Demand For Labour Flashcards
Explain derived demand for labour
Factors of production are not wanted for their own sake but for what they can produce and what output can be sold for. So the number of workers a firm wishes to employ depends principally on the revenue that can be earned from what is produced. If demand rises or the price of the product increases, a firm will seek to employ more workers
What is marginal revenue product (MRP)?
the change in a firms revenue resulting from employing 1 more worker - this result creates demand for labour
what is marginal product of labour (MPL)?
the change in output that results from employing one more worker
where do firms employ until?
where MC=MRP, where the wage of one extra worker is equal to the extra revenue they bring.
how do you calculate MRPL?
MR x MP,
marginal revenue x marginal product
what does diminishing returns to labour mean?
The law of diminishing returns says that, if you keep increasing one factor in the production of goods (such as your workforce) while keeping all other factors the same, you’ll reach a point beyond which additional increases will result in a progressive decline in output.
draw and explain the MRP curve
at first, the MRP curve increases then diminishing returns set in and MRP falls. equilibrium is reached where MRP=MC. at marginal cost 1, this is at Q1 and the wage is W1. to the left of this, if the MR received is higher than the MC, then hiring more workers would increase profits and to the right, profits would decrease ( beyond prof max)
the wage rate is then increased to W2, the marginal costs are now higher. as a result, fewer workers will be employed.
suggest a limitation of MRP
it can be difficult to measure as it is difficult to isolate output, e.g type of labour, work in teams
what are the factors affecting demand for labour?
- changes in marginal revenue e.g if there is an increase in demand for the product, price increases, marginal revenue will exceed costs, increasing the demand for labour
2.changes in the marginal product of labour- if there is an increase in productivity, marginal product would rise, increasing MRP therefore demand for labour.
draw a diagram for an increase or an increase in MRP=D in a perfectly elastic labour market.
what are the factors affecting wage elasticity of demand for labour?
Labour costs as a % of total costs- high%=elastic
Ease and costs of factor substitution- elastic when easily subsitutable
PED of final product- wage PED is the same
Time- SR inelastic, LR- inelastic FOPs not fixed
what is labour productivity?
a measure of output per worker
what are the influences on labour productivity?
- skills and training
- avalibility of complimentary factor inputs
- organisation of the production process
why is labour productivity important?
it affects the ability for a firm to compete with rival firms. this is because an increase in output as they are able to spread costs over more units of output.
what are unit labour costs?
the average cost of labour per unit of output
cost/output
if output rises what happens to unit labour costs?
falls
if cost of labour falls, what happens to ULC?
falls
if output falls, what happens to ULC?
rises
if cost of labour increases what happens to ULC?
rises
