micro 43 labour demand Flashcards
Define derived demand?
Occurs when there is demand for a good or FOP resulting from demand for an intermediate good or service.
How strong is the relationship between unemployment and AD?
Its getting weaker - UK growth has been stagnant but unemployment has been stable at 4%.
How is it possible to have a growing economy but rising unemployment at the same time?
- Technology replaces labour.
- Deindustrialisation (structural unemployment occurs)
Define marginal revenue product of labour?
Extra revenue gained by the firm from employing an extra worker.
What assumptions are made to explain the MRP theory?
- Many buyers and sellers.
- Perfect information (whos getting paid what).
- Labour is homogeneous.
- Labour are price takers.
- No barriers to entry/exit.
- Occupational mobility (change skillset quickly)
How is MRP calculated?
MPP x MR.
MR (price) - revenue from extra good.
MPP - Change in output from employing an extra worker.
What is the MPP a measure of?
productivity.
Assuming firms are profit maximisers, where will they set the level of employment?
MC = MRP
Why will labour market equilibrium not be reached when MRP>MCL?
Because firms can gain more profit from employing an extra worker.
Why will labour market equilibrium not be reached when MRP<MCL?
Because the cost of employing an extra worker is greater than the extra revenue gained from the worker.
What are the criticisms of the MRP model?
- Labour is not homogenous.
- There is occupational mobility.
- There are unions.
- No perfect information.
Define the demand for labour?
Quantity of labour firms are willing and able to hire at any given wage rate.
3 cases in which demand for labour would increase?
- More MRP.
- Price of goods and services rising.
- Price of capital rising.
Why may technology have a positive impact on the demand for labour?
- Labour is a complement.
- Creates jobs (streaming) (also creates job losses - creative destruction).
Draw both the firm and industry demand/supply curves?
ADD DIAGRAM.
Each firm is too small to influence the wage rate. So firms are price takers.
Why is the MC curve equal to the AC curve for a competitive labour market?
Because the supply curve of labour is perfectly elastic. And so the firm is unable to influence the market wage rate.
Use the MRP theory to explain why footballers are highly paid?
The demand for labour is based on productivity (MPP). The MPP of footballers is measured by G/A. This will determine the revenue generated by the club - MRP. A world class player may generate more revenue. Therefore the demand for footballers will increase. Combined with the elasticity of labour, a rise in demand will lead to a significant increase in wages.
Define elasticity of demand for labour?
Measure the responsiveness of the change in the quantity of labour demanded from a change in wage rate.
What is the equation for the elasticity of demand for labour?
% change in qty demanded / % change in wage rate.
What are the 4 determinants of the elasticity of demand for labour?
- PED of product - If the PED for the product is inelastic, the the Ped of labour will be inelastic. Because costs can be passed onto consumers.
- Wages as a proportion of total costs - If wages are high as a %, then PED for labour will be elastic because firms don’t want to see higher costs.
- Whether there are substitutes - hospitality sector has inelastic PED of labour because customer service is important.
- Time period - Overtime, substitutes of labour will create elastic PED.
When a country’s labour market is flexible, why is PED for labour elastic?
There are substitutes for them.
Why is the PED for labour in capital intensive industries inelastic?
Because highly skilled labour is needed to complement labour - no substitute for them.
Why is the PED for labour more inelastic for adult workers compared to younger workers?
Because they have miore experience.
Explain why the elasticity of labour is important in deciding whether or not a trade union has bargaining strength?
If demand for labour is elastic, then unions will not ask for higher pay. Vice versa or they will strike.
Explain why elasticity of demand for labour is important when assessing the impact of the minimum wage?
If demand for labour is inelastic, a rise in minimum wage will not lead to high unemployment, as said otherwise from neoclassical economics.
