Labour Market- DEMAND

Question 1

Define Derived Demand

Answer 1

Demand for Labour stems from the Demand for the Firm’s G+S

Question 2

What assumptions do we make when analysing the Demand for Labour?

Answer 2

Firms are Competitive

• Price Takers- in both Input + Output Market
• Profit Maximisers

Question 3

What is VMPL?

Answer 3

Value Marginal Product of Labour

Question 4

How is VMPL calculated?

Answer 4

VMPL = P x MPL

Question 5

What is the equation for Marginal Profit?

Answer 5

Marginal Profit = VMPL - Wage (=w =MC)

Question 6

Define VMPL

Answer 6

Value of Output produced by a worker

Question 7

What does the Downward Slope of VMPL show?

Answer 7

Diminishing MPL

Question 8

What does VMPL show?

Answer 8

A Firm’s Competitive, Profit Maximising Demand for Labour

Question 9

Where do Firms hire workers up too?

Answer 9

Hire workers up to where MC = VMPL

Question 10

What 3 Main factors cause Demand for Labour to Shift?

Answer 10

1. Output Prices
2. Factors affecting Productivity- e.g. Technological Change
3. Changes in other FoPs- e.g. Supply of Complementary Factors

Question 11

How do you find the Industry Demand for Labour in the SR?

Answer 11

Start Point–> Wage drops from w1 to w2–> Firm hires more workers–> Increased Output (Q)–> Increased Supply of Good–> Decreased Price from P1 to P2–> Decreased Demand for Labour (Left Shift)— Industry Demand joins start + end point.

Question 12

When Demand for Labour Increases- what happens to the Wage and Quantity of Labour?

Answer 12

Wage- Increases
Quantity of Labour- Increases
Allows Market to Clear

Question 13

When Supply of Labour Increases- what happens to the Wage and Quantity of Labour?

Answer 13

Wage- Decreases
Quantity of Labour- Increases
Allows Market to Clear

Question 14

What 3 factors can push wages Above Equilibrium?

Answer 14

• Minimum Wage Laws
• Trade Unions
• Efficiency Wages

Question 15

What is the main factor that can Push wages Below Equilibrium?

Answer 15

Monopsony- One buyer of Labour–> Lower Wages

Question 16

What happens if you set a Minimum wage above Wm in a Monopsony Market?

Answer 16

Employment increases from Lm, above the Equilibrium Quantity L* to Lmin

Question 17

In Practice- Why does Min. Wage NOT always lead to Unemployment?

Answer 17

Many Employers have Power in the Labour Market–> So they already get away with Paying a Wage that is less than the worker’s worth

Question 18

What are 3 other Factors affecting Earnings?

Answer 18

• Compensating Differentials
• Human Capital
• Signalling

Question 19

What are Compensating Differentials?

Answer 19

Difference in Wages to off-set Non-Monetary Characteristics of a Different job
-e.g. better holiday in other jobs

Question 20

What is Human Capital and how does it affect Earnings

Answer 20

Accumulation of Investments in People
Employers pay more for the Worker’s extra Productivity–> Incentive for Workers to defer earnings + undertake Training/Education

Question 21

What do Higher Earnings often refelct?

Answer 21

Higher Productivity (Human Capital) and Compensating Differentials

Question 22

What is Signalling

Answer 22

Employers lack info. about worker’s ability before hiring- Education signals to employer that worker is suitable to job
Signal- an action that costs you less the more able you are to do it-e.g. Education