Labour Demand

Question 1

What is labour demand?

Answer 1

The demand for labour is derived demand - this means that labour is only demanded when there is a demand for the final product.

Question 2

How is the level of demand for labour determined?

Answer 2

It is based on the firm’s marginal revenue productivity (MRP) - this measures the change in total revenue for a firm from selling the output produced by additional workers.

Question 3

What are the two elements of MRP?

Answer 3

1. Marginal physical productivity (MPP) - the additional output that is generated from each additional unit of labour
2. Price of the finished product

Workers will be employed if MRP is greater than wage

Question 4

Assumptions of MRP theory?-

Answer 4

1. All factors of production other than labour are fixed in quantity
2. Workers are homogenous
3. The labour market is perfectly competitive
4. Perfectly competitive product market

Question 5

Causes for shifts in the demand for labour curve other than the wage itself?

Answer 5

1. A change in the price of the final product the labour makes
2. Changes in demand for the final product
3. Changes to labour productivity
4. Changes in the price of capital

Question 6

Determinants of the elasticity of the demand for labour?

Answer 6

1. Ease of substitution of capital for labour & visa versa
2. Time span under consideration
3. Elasticity of demand of the product
4. The proportion of labour to total cost