LS9 : Demand and Supply for Labour Flashcards
why do firms demand labour?
firms want to produce output to generate revenue and make profits. labour is a key factor of production
what is derived demand?
firms do not demand labour for their own sake but for the sake of revenue that is obtained from selling the output that labour produces
what is the price of labour referred to as?
- wage rate
- salary
draw the labour demand curve.
what are four factors which can shift the demand curve for labour?
- changes in the productivity of labour
- changes in the price of the good that labour produces
- changes in the demand of the good that labour produces
- changes in the price of capital
how can changes in the productivity of labour shift the labour demand curve?
labour demand is derived demand, so labour is demanded to produce output. if labour becomes more productive, then this will lead to an increase in the demand for labour, shifting the curve outwards
how can changes in the price of the good that labour produces shift the labour demand curve?
if price of the good increases, economic theory predicts that firms will increase production. to expand output, firms will need to increase inputs to production, such as labour. labour shifts outwards
how can changes in the demand of the good that labour produces shift the labour demand curve?
if demand for the good increases, more workers will be needed in that industry, so demand for labour would increase. can occur when there is a boom or if consumer preferences shift
how can changes in the price of capital shift the labour demand curve?
firms can substitute labour for capital, so if capital becomes more expensive, firms will employ more labour and vice versa. in developed country, many firms will specialise in capital-intensive processes because labour is highly skilled and expensive. in the developing world, where labour is abundant and lacking in skills, it is cheaper to employ workers than capital.
how do wage rates affect the labour demand curve?
movement up or down
what are the two effects to the supply of labour of an increase in wage rate?
- attract more workers into the industry, increasing labour supply
- affects supply decisions of workers already in the industry, has ambiguous effects
how is the wage rate seen as an opportunity cost to an individual?
if a worker chooses to take more leisure time, they are forgoing income-earning opportunities.
wage rate can be seen as the opportunity cost of leisure
what is the effect if there is an increase in the wage rate?
increasing wages raises opportunity cost of leisure. has two effects :
- substitution effect
- income effect
what is the substitution effect in relation to labour?
as leisure time is now more costly, there will be a substitution effect against leisure. in other words, workers will be motivated to work longer hours. results in more labour offered.
what is the income effect in relation to labour?
higher wage brings workers a higher level of income, encouraging consumption of more goods, including leisure time, it is assumed leisure is a normal good. results in more demand for leisure
draw the supply of individual labour curve.
at relatively low wages, the substitution effect will tend to be stronger. as wages rise, the income effect may gradually become stronger.
at some wage level, the worker will choose to supply less labour and demand more leisure.
draw the industry labour supply curve
more people will tend to offer themselves for work when the wage is relatively high
draw the wage equilibrium diagram
explain the wage equilibrium diagram.
downward sloping demand curve and upward sloping labour supply curve. equilibrium is found at the intersection, representing wage equilibrium.
if wages are below W, then vacancies will be unfilled and a higher wage will have to be offered.
if wages are above W, there is an excess supply of labour and wage will move down until W*, is reached and equilibrium obtains
