Micro 22: The Labour Market Flashcards
Explain why demand for Labour is a derived demand
It derives from the need from firms to produce goods and services
Explain what would cause a shift in the demand curve for labour
Firms demand labour for the revenue that’s gained from selling the output produced by that labour- marginal revenue product (what they produce x selling price)
Explain the relationship between marginal physical product, marginal revenue product and demand for labour
Marginal revenue product = marginal physical product x selling price
Explain monetary and non-monetary determinants of the supply of labour in a market
Supply of labour refers to the number of people willing to supply their labour services at a given wage rate.
The decision to supply labour involves opportunity cost- leisure (not working) being the opportunity cost. A decision to supply labour will weigh the cost of leisure against the cost of goods and services which can be purchased with income from working.
Explain what causes supply of labour to shift
-More immigration
-Increasing the retirement age or encouraging people who are currently economically inactive to enter the workforce
-Making it financially less attractive to remain out of work by paying less generous unemployment benefits and increasing incentives for the unemployed to take work, eg. through cutting income tax or allowing tax credits for those on low incomes so people can keep more of what they earn
How are wages determined in a perfectly competitive market?
It assumes all workers/ each unit of labour is homogenous and unable to influence the wage rate so workers have to accept it, there’s perfect mobility of labour, freedom of entry to and to exit and perfect information.
Firms are wage takers since if they pay a wage below equilibrium workers wouldn’t accept it and work for rival firms. They maximise profit by employing the quantity of labour at which MRP=MC (the wage rate).
