Labour Demand, Supply and Wage Determination

Question 1

What type of demand is the demand for labour?

Answer 1

A derived demand

Question 2

What is a derived demand?

Answer 2

Demand for one item depending on the demand for another item

Question 3

What factors influence the number of workers/working hours a firm seeks to employ?

Answer 3

• Demand and expected future demand for the products produced
• Productivity
• Wage rate
• Complementary labour costs
• The price of other factors of production

Question 4

How does demand and expected future demand for the products produced influence the number of workers or working hours firms are seeks to employ?

Answer 4

Demand increases, or demand is expected to increase - firms will increase the number of workers/ working hours

Question 5

How does productivity influence the number of workers or working hours firms are seeks to employ?

Answer 5

The higher the output per worker the hour, the more attractive labour is as a resource

Question 6

How does the wage rate influence the number of workers or working hours firms are seeks to employ?

Answer 6

A rise in the wage rate above any rise in labour productivity will raise unit labour costs and likely to result in a contraction in demand

Question 7

How does complementary labour costs influence the number of workers or working hours firms are seeks to employ?

Answer 7

Firms incur other costs when they employ labour. So, for example, if national insurance contributions rise, demand for labour is likely to fall

Question 8

How does the price of other factors of production influence the number of workers or working hours firms are seeks to employ?

Answer 8

The price of other factors of production that can be substitutes for or complements to labour. If, for instance, capital becomes cheaper and is a substitute to labour, firms may seek to replace some of the workers by machines

Question 9

What is marginal revenue product? (MRP)

Answer 9

The change in a firm’s revenue resulting from employing one more worker

Question 10

What is the marginal product of labour? (MPL)

Answer 10

The change in output that results from employing one more worker

Question 11

Why can it be difficult to measure MRP?

Answer 11

It is difficult to isolate the contribution one worker makes to changes in output (workers often work in teams, employment frequently changes by more than one more worker, and it can be difficult to separate out the contribution made by labour and capital)

Question 12

A change in the wage rate will cause a movement along…

Answer 12

The demand curve for labour

Question 13

The extent to which demand will contract or extend as a result of a change in the wage rate is measured by…

Answer 13

The elasticity of demand for labour (also known as the wage elasticity of demand for labour)

Question 14

What is the formula for the wage elasticity of demand for labour?

Answer 14

Elasticity of demand for labour = % change in the quantity of labour demanded / % change in wage rate

Question 15

What are the factors which influence the elasticity of demand for labour?

Answer 15

• The price elasticity of demand for the product produced
• The proportion of wage costs in the total costs
• The ease with which labour can be substituted by other factors
• The elasticity of supply of complementary factors
• The time period

Question 16

How does the price elasticity of demand for the product produced influence the elasticity of demand for labour?

Answer 16

If demand for the product is inelastic, the demand for the labour that produces it is also likely to be inelastic. This is because the rise in the price of the product that will result from the rise in the wage rate will cause a smaller percentage fall in demand for the product. So, as output will not change by much, employment will not fall significantly

Question 17

How does The proportion of wage costs in the total costs

Answer 17

xcvbn