Lecture 7- Labour market and wage determination Flashcards
What is the competitive factor market?
They have many small buyers and sellers who act as price takers.
Where inputs ( factors) are supplied by sellers and purchased by firms to produce outputs.
The equilibrium is determined by the intersection of the factor and supply and factor demand curves
What are examples of factors in a competitive factor market?
Labour, land and capital
What is the value of marginal output (VMP)/ marginal revenue product of labour (MRPL)?
The additional revenue a firm earns from hiring one extra worker.
What is the hiring rule for perfectly competitive firms in a competitive factor market?
To choose that amount of labour for which wage rate if equal to VMP.
Explain the short run factor demand for labour.
In the short run:
1. The firms capital (K) is fixed
2. The firm can vary its labour input (L) to produce output (q).
The firms decision to hire one more worker depends upon the marginal revenue product of labour compared with the wage rate.
Give the formula for marginal revenue product of labour (MRPL)
MRPL= MR * MPL
Where:
MR= marginal revenue (The extra revenue for selling one more unit of output)
MPL= marginal product of labour (The extra output produced when hiring an additional worker.
What is the calculation of MRPL for a firm in a competitive market?
MR = P
Therefore:
MRPL= P * MPL
As the firm is a price taker in the output market.
This can also be called the value of the marginal product of labour (VMPL) because it represents the market value of the additional output produced by one worker.
Where does a firm in the short run factor of demand profit maximise?
Where:
The marginal revenue product of labour is equal to the wage rate.
MRPL = w
What are the consequences if MRPL is greater than the wage rate?
Hiring more workers increases profits because the additional revenue exceeds the additional cost.
What are the consequences if MRPL is less that the wage rate?
Reducing the workforce increases profits because the cost of labour exceeds the revenue generated.
What is long run labour demand and state the key features of it.
The long-run labour of demand curve reflects the quantity of labour a firm would employ when it can adjust all inputs, including both labour and capital, in response in wages.
Input substitution
Flatter Long-run demand curve due to the flexibility in adjusting capital and labour
Explain input substitution as a key feature of the Long-run demand curve for labour.
In the long-run, firms can substitute between labour and capital.
This substitution makes the long run labour demand more elastic than the short run because firms have more options to adjust their input mix.
Explain the flatter long run demand curve.
The flatter LRDC is because of the flexibility in adjusting capital and labour.
A small wage reduction leads to a larger increase in labour demand in the long run compared to the short run.
What is the market demand for labour?
The total quantity of labour that all firms in a particular market are willing to hire at different wage rates, holding other factors constant.
How is the market demand for labour found?
By summing up the individual labour demand of all firms in the market.
What is derived demand?
The demand for labour that arises from the demand for goods and services that labour helps to produce.
Explain the demand curve in the market demand for labour
It has derived demand and a downward sloping demand curve, showing an inverse relationship between wage rate and the quantity of labour demanded.
What factors do the responsiveness of labour demand to changes in wage depend on?
Availability of substitutes
Elasticity of demand for that firms output
Proportions of labour costs in total production costs.
How do you derive the market demand for labour?
Each firms demand for labour is based on the marginal product of labour (MRPL)
Therefore, find the marginal revenue product of labour by
MRPL= P * MPL
p= Market price of the output
MPL= Marginal product of labour
Profit maximising firms hire labour until MRPL = w
Therefore,
The market demand for labour at any given wage is the horizontal summation of the labour demand curves of all individual firms.
What are the 4 factors affecting market demand for labour?
Output price
Productivity
Cost of substitutes
Number of firms
Explain output price as a factor affecting market demand for labour
A rise in the price of the final product increases the MRPL, shifting the labour demand curve outwards.
Explain productivity as a factor affecting market demand for labour
Improvements in worker productivity, through training or improved technology increases the MPL, shifting the demand curve for labour outwards.
Explain how firms substitute between labour and other factors as a factor affecting market demand for labour.
If the cost of capital or other inputs rise, firms may substitute capital for those inputs, increasing labour demand.
Explain how the number of firms affects the market demand for labour
An increase in the number of firms in the market increases total labour demand, shifting the market demand curve outwards.