LS9- Demand and Supply for Labour

Question 1

What is a firm?

Answer 1

An organisation that brings together factors of production in order to produce output.

Question 2

Why is the demand for labour a derived demand?

Answer 2

Firms do not demand labour for its own sake, but for the sake of the revenue that is obtained from selling the output that labour produces.

Question 3

What is meant by the phrase ‘there is a multitude of sub-markets in the economy, not just a single market for labour’?

Answer 3

• individual workers differ from each other in terms of their characteristics and skills e.g. lawyers and accountants
• there are also geographic sub-markets

Question 4

What is the price of labour referred to as?

Answer 4

Wage rate (hourly) or salary (yearly)

Question 5

Factors that can shift the demand curve for labour

Answer 5

• changes in the productivity of labour e.g new technological advance can raise its productivity-> greater demand for labour
• changes in the price of the good labour produces - if the price of the g/s rises, firms raise production
• changes in the demand of the good labour produces- more workers needed if rise in demand
• changes in the price of capital- if capital is more expensive, firms will employ more labour (substitutes)

Question 6

Effects of a rise in wage rates on the supply of labour

Answer 6

• raises the opportunity cost of leisure- there will be a substitution effect against leisure i.e. workers will be motivated to work longer hours
• real income effect- encourages consumption of g/s including leisure as a normal good
• the net effect could go either way

Question 7

Why is the individual labour supply curve backward bending?

Answer 7

• at relatively low wage rates, the substitution effect will tend to be stronger
• as wages are become higher, the real income effect tends to be stronger

Question 8

Non price related factors affecting the individual supply of labour

Answer 8

• job satisfaction
• non-pecuniary benefits (fringe benefits) such as a subsidised canteen or a gym
• these can lead to shifts in the labour supply curves

Question 9

The industry labour supply curve

Answer 9

• can be expected to be upwards sloping because more people will tend to offer themselves for work when the wage is relatively high
• wages act as a signal to workers about which industries are offering the best returns to work- a way in which the price mechanism operate to allocate resources

Question 10

Factors affecting the industry labour supply curve

Answer 10

• size of the working age population (birth & death rates, + net immigration)
• wages on offer in substitute occupations
• barriers to entry
• non-pecuniary benefits