Labour markets Flashcards
What type of demand is the demand for inputs?
Derived demand
What are key inputs into the production proccess?
Land
Labour
Capital
Describe the key inputs in the production process
What are inputs either?
Fixed or variable
What is a fixed input?
fixed—that is, cannot change in the short run (e.g., machinery)
What is a variable input?
variable —that is, can change in the short run (e.g. labour)
What occurs when a firm tries to increase output by applying additional variable inputs to a fixed factor in the short run?
In the short run, the law of diminishing returns comes into play whenever a firm tries to increase output by applying additional variable inputs to a fixed factor. If a firm increases the number of variable factors they use, such as labour, while keeping one factor fixed, such as machinery, the extra output or returns from each additional, marginal unit of the variable factor must eventually diminish.
In the long run to increase output and counteract diminishing returns what can occur?
In the long run, capital can be used to replace labour.
What are the main costs of working for the worker
- the worker must sacrifice leisure
- the work may be unpleasant, challenging, boring or dangerous etc
What does an extra hour of work involve for the worker?
Why can the supply curve of labour also bend backwards, diagram
The labour supply faced by an individual employer depends on market structure:
- If employer is a wage taker, the supply curve will be perfectly elastic,
- If employer is a wage maker, it will be upward sloping.
How does the market supply curve usually slope, describe the meaning
- The market labour supply curve is usually upward sloping: the higher the wage,
the more the hours worked.
What does the position of the curve depend on?
The position of the curve depends on:
# of qualified people,
non-wage benefits/costs of job & other jobs
What does the responsiveness of the supply of labour to the change in wages (elastcitiy) depend on?
(a) difficulty to change jobs
(b) whether we’re in the long- or short-run
Wages will increase more with demand if supply is more inelastic
What is the marginal input rule?
Marginal input rule: as long as the firm does not shut down, a firm should employ the number of units of labour such that he can maximise his profit where:
(marginal revenue product of labour) MRPL = MCL (marginal cost of labour)
Explain the marginal input rule
MRPL is the change in TR 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
If MRPL > MCL, then…
employing one more unit increases TR more than TC
What is the equation for the marginal revenue product of labour?
The marginal revenue product of labour is given by:
MRPL = MR x MPPL (marginal revenue x marginal physical product of labour)
where MPPL is how much output the extra unit of labour produces
WHat is the equation for the maringal input rule?
MRPL = MR x MPPL = MCL MR = MCL / MPPL
What is MCL / MPPL ?
It is the extra cost of producing one of those units of output: MCL / MPPL = MC MR = MCL / MPPL = MC
Marginal input rule & marginal output rule are effectively what?
the same
Diagram to show the marginal physical product of labour
What are the assumptions for a perfectly competitive labour market?
A(1): Buyers of labour (firms) operate in a perfectly competitive output market
A(2): Buyers of labour (firms) are wage takers in the labour (input) market
A(3): Both buyers and sellers have complete information
A(4) Workers are wage takers
A(5) Entry for workers is ‘free’
What does it mean when buyers are price takers in the product market?
MRPL = MR x MPPL = p x MPPL
What does it mean when buyers are price takers?
MCL = w
Describe A(1): Buyers of labour (firms) operate in a perfectly competitive output market
A(1): Buyers of labour (firms) operate in a perfectly competitive output market
The price for the output is taken as given
They believe that they can sell as much of their output as they want at the going price without affecting that price, so p = MR
When buyers are price takers in the product market, MRPL = MR x MPPL = p x MPPL
Describe A(2): Buyers of labour (firms) are wage takers in the labour (input) market
A(2): Buyers of labour (firms) are wage takers in the labour (input) market
Each firm takes the wage rate as given
They believe that they can employ as much labour as they want at the going wage rate without having an effect on that wage rate
When buyers are wage takers, MCL = w
Describe A(3): Both buyers and sellers have complete information
A(3): Both buyers and sellers have complete information
Workers are aware of available jobs and know the conditions of employment Employers know the amount of labour available and how productive it is
Describe A(4): Workers are wage takers
A(4): Workers are wage takers
Each worker believes how much labour he/she supplies will not affect the market price.
This has two parts to it:
(a) a worker can supply as much as labour he/she wants, at a given wage(b) a worker’s supply choice leads to no reaction from other workers
Describe A(5): Entry for workers is ‘free’
A(5): Entry for workers is ‘free’
A potential worker can enter the market without incurring costs that an incumbent worker would not incur
No restrictions on the movement of labour
No barriers from unions or government
Entry is often assumed to a long-run decision
It takes time for workers to become educated, relocate, change jobs
What si the appropriate market structure?
Show the profit maximising position of an individual curve
When is the market in equilibrium in the short run?
(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
What do the market equilbrium in the labour market characteristics imply?
(1) The price in the product market is determined by supply and demand
(2) The market wage is determined by market supply & demand
(3) A seller’s output is determined seller-specific supply & demand
What is the price in the product market determined by?
Supply and demand
What is the market wage determined by?
market Supply and demand
What is a sellers output determined by?
sller -specific Supply and demand
Summary notes for the perfect labour market
Diagrams for the short run equilibrium of the perfect labour market
When are labour markets imperfect?
Labour markets are imperfect when employees and/or employers are wage maker
What are wage making employers?
Wage making employers: when there is only one employer of a certain type of labour (monopsony) or few of them (oligopsony).
e.g., Royal Mail is a monopsony employer of postal workers.
What are wage making employees?
Wage making employees: when they have a unique talent or when they create a union & threaten industrial action if demands not met.
What happens when a monopsony faces a monopolist union?
If a monopsony employer faces a monopolist union, it refers to a bilateral monopoly.
