L22 - Perfect Labour Markets Flashcards
What are the Inputs required to make outputs?
Labour
Capital
Land
What happens to the Inputs in the Short Run and Long Run?
-Labour is variable in SR
-Increasing Output likely to
lead to diminishing returns
In LR, Capital used to replace labour
What are the two main costs of work to the worker?
a) Worker must sacrifice leisure
b) Work may be unpleasant,challenging, boring etc.
What are the two effect for the Supply of Labour to a worker?
a) Substitution Effect
At higher wages person sacrifice leisure for work up to W1
b) Income Effect
Above W1, Workers can afford more leisure time and so work less
What does the individual employers labour supply curve depend on?
Market Structure
If employer is wage taker, Supply Curve perfectly elastic
If employer wage maker, upward sloping
What is the general market labour supply curve?
Usually upward sloping
Wages will increase more with demand if supply more inelastic
What affects the position of the Market Supply Curve?
No of qualified people
Non-wage benefits/ costs of job and other jobs
What does the responsiveness of the supply of labour to a change in wages depend on?
a) difficulty to change jobs
b) whether we’re in the long- or short-run
How do we see how much the firm should employ?
Use the Marginal Input Rule
What is the Marginal Input rule?
buyer should employ the number of units of labour where:
MRPL = MCL
Why should firms employ where MRPL= MCL?
MRPL is the change in TR revenue due to employing one more unit of labour
MCL is the change in TC due to employing one more unit of labour
If MRPL > MCL
Then employing one more unit increases TR more than TC
How do you find the MRPL?
MRPL = MR x MPPL
Where MPPL is how much output the extra unit of labour produces
MR = MCL/MPPL
What are the assumptions of Perfectly Competitive Labour Markets?
1) Buyers of Labour (Firms) operate in Perfectly Competitive Output Market. (Price for output taken as given)
2) Buyers of Labour (Firms) are wage takers in labour market.
3) Buyers and Sellers have complete information
(Workers aware of available jobs, Firms aware of labour available)
4) Workers are wage takers
a) Worker can supply as much labour as they want at given wage
b) Workers supply choice leads to no reaction from other workers
5) Entry for workers is ‘free’
What is the market structure for perfectly competitive labour markets?
1) Many small sellers (workers)
2) Low barrier to entry/exit
3) Undifferentiated sellers (all labour is the same)
4) Many small firms
When is the Labour Market in equilibrium in the Short Run?
in equilibrium when:
(a) Buyers of labour (firms) choose optimal employment levels, given market wage
(b) Sellers of labour (workers) choose optimal supply levels, given market wage
(c) Sellers supply as much as buyers want to purchase,
Buyers purchase as much as sellers choose to supply
