factors influencing the demand for labour Flashcards
what is the labour market composed on?
composed of sellers of labour (households) and buyers of labour (firms)
Workers supply their labour, and firms demand labour
what is the demand for labour?
The demand for labour is a derived demand
This means that it depends on the demand for goods and services
If demand for goods and services increases, then demand for labour will increase, and vice versa
what are wage rates determined by?
determined by the contribution of labour to the firm
what does the demand for labour depend on?
The Marginal Physical Product of Labour (MPPL)
The Marginal Revenue Product of Labour (MRPL)
what is the marginal physical product of labour?
its the extra output produced when an additional unit of labour is employed
what is the law of diminishing marginal returns for labour?
as more of a variable factor is added to fixed factors , there will be an initially increase in productivity.However there will be a point where adding additional units will decrease productivity due to the relationship between labour and capital .
marginal physical product equation
change in total output÷change in quantity of labour
what is the marginal revenue product?
its the extra revenue earned when an extra unit of labour is employed
If output is sold in a perfect competitive market , then marginal revenue is equal to price charged
MRP = mpp x price
what type of relationship is between wage rate and quantity of labour demanded according to the marginal productivity theory
inverse relationship
what factors shift the demand curve for labour ?
if wage rate is the only factor that changes, there will be movement along the demand curve
when demand curve shifts to left - fewer workers are employed at each wage rate
when demand curve shifts to the right-more workers re employed at each wage rate
factors that influence the demand for labour
-the price of the product being produced - if selling price increases firm will be incentivised to supply more - firms demand for labour will increase
-the demand for then final product - As demand for labour is a derived demand, when an economy is booming then demand for most goods and services will be high - and the demand for labour will be high
The demand for labour curve will shift right
Conversely, when an economy is in a recession, demand for most goods and services will be lower - and the demand for labour will be lower
The demand for labour curve will shift left
-The ability to substitute capital(machinery) for labour-Firms will constantly evaluate if it will be possible and more cost effective to switch production from using labour to capital (machinery)
If it is more cost effective, then demand for labour will fall
The demand for labour curve will shift left
-The productivity of labour - If the productivity of labour increases (possibly through training) this will lower average costs and firms will likely demand more labour
The demand for labour curve will shift right
what does elastic of demand for labour refer to?
refers to how responsive a firms demand for labour is to a change in the price of labour (wage rate)
what does it mean if demand for labour is elastic?
then an increase in the wage rate will result in a more than proportional decrease in the quantity of labour demanded by firm
If demand is elastic, firms will be very responsive to changes in wage rates, rapidly hiring workers when wages fall and firing workers when wages rise
what does it mean if the demand ion labour is inelastic?
then an increase in the wage rate will result in a less than proportional decrease in the quantity demanded of labour demanded by
If demand is inelastic, firms will have a much smaller response to rising or falling wages
what factors influence PED?
- proportional to labour costs to total costs - the higher the promotion , the more elastic the demand for labour , the lower proportion, the more inelastic the demand for labour will be
Ease and cost of factor substitution - If substituting capital for labour is easy and the cost is comparable to the increase in wages, the demand for labour will be more elastic, and vice versa
PED of final product -If the product being produced is price inelastic in demand, then the demand for labour is likely to be more inelastic
If wages rise, firms will pass on the increased costs of production to the final consumers
Time period - I short-run, demand for labour is likely to be more price inelastic
An increase in wages will have a less than proportional decrease in the quantity demanded
medium to long-term firms can research alternative methods of production & the demand for labour becomes more price elastic
