Labour Markets

Question 1

What does the demand curve for labour show?

Answer 1

The quantity of labour that employees would wish to hire at each possible wage rate

Question 2

What is the demand for labour determined by?

Answer 2

The marginal revenue product (MRP) - the extra revenue generated by an individual worker

Question 3

What is the relationship between the MRP and the demand for labour (workers)?

Answer 3

The higher the MRP, the higher the demand for labour

Question 4

What is the name of the law that states that ‘increasing the number of workers, while all factors are fixed, is likely to increase MRP at first but then cause it to decline’?

Answer 4

The law of diminishing marginal productivity

Question 5

State the 2 reasons why the demand for labour is downwards sloping

Answer 5

1. In the long run, all the factors of production vary, so high wage rates will encourage businesses to use machinery instead of workers
2. In the short run, firms have fixed levels of capital, diminishing marginal productivity means that adding extra workers gives a lower return, so to employ these workers, the wage rate has to fall

Question 6

What is the formula for MRP?

Answer 6

Marginal Output X Price OR the difference in total revenue

Question 7

Why is the demand for labour derived demand?

Answer 7

Firms hire workers in order to produce goods that meet their demand

derived from the demand