Labour Markets

Question 1

What is the substitution effect (Demand)

Answer 1

When the price of workers increases, firms don’t want to hire as many workers and so they replace them with capital

Question 2

What is MRP (marginal revenue product)

Answer 2

The additional revenue from employing an extra worker

Question 3

Why is the labour demand curve downward sloping

Answer 3

Marginal Revenue Product
Substitution effect
More people hired as they cost less

Question 4

Factors which determine a shift for the demand for labour

Answer 4

Productivity,
Price of capital substitutes, Derived demand,
Increases in the price of the final product

Question 5

What is derived demand

Answer 5

When the demand for labour increases because of an increased demand for the final good/service

Question 6

Determinants of Elasticity of Demand for Labour

Answer 6

Time – Takes time = inelastic
Availability of subs – can’t replace with anything = inelastic
Elasticity of D for Products - inelastic product = inelastic labour
Proportion of labour cost of total cost – low percent of the price = inelastic

Question 7

Reason for upward slope of the supply of labour

Answer 7

Substitution effect

Income effect

Question 8

What is the substitution effect (supply)

Answer 8

As wages go up, work becomes more rewarding and leisure time becomes more expensive (in terms of opportunity cost). People will therefore take less leisure time and work longer hours. They substitute leisure time for work.

Question 9

What is the Income effect (supply)

Answer 9

As workers are paid more they can afford the luxury of leisure time, while still maintaining a good standard of living. So as wages go up, people will work less as fewer hours give them a sufficient income.

Question 10

Factors that determine labour supply

Answer 10

Skills/qualifications, Population size, Perks/benefits,
Location/ transport,
Salaries in other industries

Question 11

Determinants of the elasticity of supply for labour

Answer 11

Skills required

Vocational nature of work (skills specific to one type of job)

Question 12

How is wage determined in a perfectly competitive market

Answer 12

By the Supply and Demand curve

Question 13

How are wages determined in an imperfectly competitive markets

Answer 13

Trade unions

Monopsony employers

Question 14

How do trade unions determine wages

Answer 14

The trade unions can refuse to accept the equilibrium price

Question 15

How Monopsony employers determine wages

Answer 15

When one firms has the whole market so workers have to accept a lower wage

Question 16

How does government intervention determine wages

Answer 16

Min/Max wages

Public sector wage settings and benefits

Question 17

How do unemployment benefits effect wages

Answer 17

If firms offer wages which are less than the unemployment benefit then nobody will work for them

Question 18

What are the market failures with the Labour markets (3)

Answer 18

• Labour immobility: occupational and geographical
• Inequality due to low wages
• Labour market rigidities/sticky wages caused by trade unions

Question 19

What is Labour immobility: Geographical and Occupational

Answer 19

Geographical: when workers find it hard to move to another area
Occupational: the ability of workers to transfer from one occupation to another (skills)

Question 20

What are Labour Market Rigidities

Answer 20

Caused when the price mechanism is prevented from working and wages are kept artificially high above the equilibrium (min wages, trade unions)

Question 21

What are inequalities due to low Equilibrium Wages

Answer 21

If left to the free market, there can be rising wage inequality