Lecture 7- Labour market and wage determination

Question 1

What is the competitive factor market?

Answer 1

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

Question 2

What are examples of factors in a competitive factor market?

Answer 2

Labour, land and capital

Question 3

What is the value of marginal output (VMP)/ marginal revenue product of labour (MRPL)?

Answer 3

The additional revenue a firm earns from hiring one extra worker.

Question 4

What is the hiring rule for perfectly competitive firms in a competitive factor market?

Answer 4

To choose that amount of labour for which wage rate if equal to VMP.

Question 5

Explain the short run factor demand for labour.

Answer 5

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.

Question 6

Give the formula for marginal revenue product of labour (MRPL)

Answer 6

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.

Question 7

What is the rule for a competitive firm looking at the MRPL?

Answer 7

MR = P

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.

Question 8

Where does a firm in the short run factor of demand profit maximise?

Answer 8

Where:

The marginal revenue product of labour is equal to the wage rate.

MRPL = w

Question 9

What are the consequences if MRPL is greater than the wage rate?

Answer 9

Hiring more workers increases profits because the additional revenue exceeds the additional cost.

Question 10

What are the consequences if MRPL is less that the wage rate?

Answer 10

Reducing the workforce increases profits because the cost of labour exceeds the revenue generated.

Question 11

Explain the key features of the long run labour demand

Answer 11

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

Question 12

Explain input substitution as a key feature of the Long-run demand curve.

Answer 12

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.

Question 13

Explain the flatter long run demand curve.

Answer 13

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.

Question 14

What is the market demand for labour?

Answer 14

The total quantity of labour that all firms in a particular market are willing to hire at different wage rates, holding other factors constant.

Question 15

How is the market demand for labour found?

Answer 15

By summing up the individual labour demand of all firms in the market.

Question 16

What is derived demand?

Answer 16

The demand curve depends on the demand for goods and services that labour helps produce.

Question 17

Explain the demand curve in the market demand for labour

Answer 17

It has derived demand and a downward sloping demand curve, showing an inverse relationship between wage rate and the quantity of labour demanded.

Question 18

What factors do the responsiveness of labour demand to changes in wage depend on?

Answer 18

Availability of substitutes

Elasticity of demand for that firms output

Proportions of labour costs in total production costs.

Question 19

How do you derive the market demand for labour?

Answer 19

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

For 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.

Question 20

What are the 4 factors affecting market demand for labour?

Answer 20

Output price

Productivity

Cost of substitutes

Number of firms

Question 21

Explain output price as a factor affecting market demand for labour

Answer 21

A rise in the price of the final product increases the MRPL, shifting the labour demand curve outwards.

Question 22

Explain productivity as a factor affecting market demand for labour

Answer 22

Improvements in worker productivity, through training or improved technology increases the MPL, shifting the demand curve for labour outwards.

Question 23

Explain the cost of substitutes as a factor affecting market demand for labour.

Answer 23

If the cost of capital or other inputs rise, firms may substitute labour for those inputs, increasing labour demand.

Question 24

Explain how the number of firms affects the market demand for labour

Answer 24

An increase in the number of firms in the market increases total labour demand, shifting the market demand curve outwards.

Question 25

Explain the importance between leisure and income in the labour supply.

Answer 25

The choice for people is between income and leisure.

The wage rate determines how much income is earned per hour of labour.

Question 26

How do you calculate total income?

Answer 26

Y= w * L+V

V= non labour income (benefits, inheritance)
L- leisure activities
w- wage rate

Question 27

What are substitution effects in relation to labour supply?

Answer 27

A higher wage rate increases the opportunity cost of leisure.
Individuals may substitute leisure for labour, working more hours to take advantage of higher earnings.

Question 28

What is the income effect in relation to labour supply?

Answer 28

A higher wage raises overall income, potentially reducing the need to work more hours.

Question 29

Explain the Backward bending supply curve in relation to labour supply.

Answer 29

At a low wage level the substitution effect dominates.

As wage rises, the opportunity cost of leisure increases, so individuals are incentivised to work more house to earn additional income. This results in an increased labour supply with the higher wage.

However at a higher wage level: income effect dominates:

As wage increases and continues to rise, individuals achieve higher levels of income and may begin to value leisure more than additional income.
This results in the labour supply decreasing as the wage rate rises further.

Question 30

What is a monopsony?

Answer 30

A market with just one buyer.

Government military equipment/ NHS

Question 31

What are some key features of a monopsony?

Answer 31

Monopsonist firm controls the labour market because it has the market power to set the market wage rate.

The firms Marginal cost of labour (MCL) exceeds the wage rate for all levels of labour employed.

The optimum level of employment for a monopsonist is the level which marginal factor costs and the demand for labour are equal.

Question 32

What are total factor costs?

Answer 32

The total expenses incurred by a firm to employ all the factors of production—such as labor, capital, land, and entrepreneurship—to produce goods or services.

Question 33

What are marginal factor costs?

Answer 33

The amount by which total factor costs changes with the employment of an additional unit of input.

Question 34

Explain the comparison between monopsony and competition in labour markets.

Answer 34

The monopsony hires fewer workers and pays lower wages than the competitive market

This creates a deadweight loss to society.

Question 35

What is discrimination in the labour market?

Answer 35

Wage differentials or unequal employment opportunities for workers.

Question 36

Where does discrimination in the labour market arise?

Answer 36

From biases or preferences help by employers, customers or other employers.

These lead to inequality and distort market efficiency.

Question 37

What are the 3 types of discrimination in the labour market?

Answer 37

Customer discrimination

Employer discrimination

Employee-taste discrimination

Question 38

Explain customer discrimination in the labour market.

Answer 38

Customers may not want to interact with employers from certain demographci or minority groups.

Employers, seeking to maximise profits, might respond by hiring fewer workers from these groups or by paying them less.

The firm incurs a cost by restricting its pool of potential employees which would lower overall productivity.

Question 39

Explain employer discrimination in the labour market.

Answer 39

Employers hold arbitary preferences for one group of workers over another, unrelated to productivity.

Employers may pay different wages to equally productive workers based on characteristics such as gender, race or ethnicity.

Employers face higher costs by not hiring the most qualified or cost effective employees.

Question 40

Explain employee-taste discrimination in the labour market.

Answer 40

Employees are unwilling to work alongside people from certain groups.

Employers may prevent hiring minority workers or segregate workplaces to prevent conflicts.

This can limit workplace segmentation and limit diversity, reducing opportunities for skill-sharing and innovation.