Economics of the Labour Market

Question 1

What are the 4 factors of production?

Answer 1

1. Land
2. Labour
3. Capital
4. Enterprise

Question 2

Example of Labour vs Capital substitutability?

Answer 2

Milo’s Knitwear = Hong Kong based company with $1.8 million worth of knitting machines in its factory in Dongguan Province vs 150 labourers.

Question 3

What affects the degree of substitutability of labour vs capital? (3)

Answer 3

1. Relative supply of labour (UK vs China)
2. Level of technology.
3. Degree of difficulty of the job.

Question 4

What affects the elasticity of demand for labour? (5)

Answer 4

1. Macroeconomic conditions
2. Availability of substitutes (outsourcing, capital …)
3. Time (more elastic in the long run - contracts etc.)
4. Elasticity of demand of the good (less elastic the good, the less elastic the labour)
5. Percentage of total costs that labour costs represent.

Question 5

What exactly is Marginal Revenue Product?

Answer 5

The change in total revenue attributed to the last worker employed.

Question 6

Why do we bother with MRP?

Answer 6

A firm seeking to maximise the efficiency of its inputs will look to employ workers at a quantity and a wage rate where MRP = MCL

Question 7

Stinking Bishop’s cheese idea =

Answer 7

The total costs of employing an extra worker are not just about increasing wages. Inclues things like training, overalls, extra car parking and extra machinery.

Question 8

Evaluation of this theory

Answer 8

1. Wages may not actually have to increase for every worker when an extra one is employed - lots of firms now have rules against sharing info on wages.

Question 9

Factors that determine MRP (2)

Answer 9

1. Type of market. In perf comp, MRP = Marginal physical product * price. In imperfect competition MRP = TR of N workers - TR of N-1 workers.
2. Demand for the product.

Question 10

Why does MRP slope downwards? (2)

Answer 10

Decreasing level of appropriate skills for the job (assume that you employ best qualified workers first)
2. Land and Capital may be fixed, so increasing the level of workers but not increasing the capacity of the firm will lead to decreasing MRP.

Question 11

Why does the supply curve of labour of an individual bend backwards?

Answer 11

Substitution effect outweighs income effect up until a point. From then onwards, the income effect outweighs the substitution effect.

Question 12

With regards to labour, what is the substitution effect?

Answer 12

As the wage rate increases, the opportunity cost of leisure increases, therefore demand for leisure decreases whilst the demand for work increases (for the individual) therefore one will try and work more hours.

Question 13

With regards to labour, what is the income effect?

Answer 13

As an individual earns more money they will want to spend it.