Perfect labour markets

Question 1

What are the key FOP?

Answer 1

Labour
Capital
Land

Question 2

What’re the 2 types of inputs?

Answer 2

Fixed (can’t change in SR, e.g. machinery)

Variable (can change in SR, e.g. labour)

Question 3

What gives the shape of the backwards bending supply curve?

Answer 3

Sub. effect (higher wages, person will work more > greater opp. cost of leisure)

Income effect (higher wages > workers can achieve target income by working less hours)

Question 4

What does labour supply to an employer depend on?

Answer 4

The market structure

Employer = wage-taker > S = perfectly elastic

Employer = wage-maker > upward sloping

Question 5

What does the elasticity of supply of labour depend on?

Answer 5

The difficulty to change jobs

Whether we’re in the SR or LR

Question 6

Marginal input rule

Answer 6

As long as the firm doesn’t shut down, a firm should employ the no. of units of labour to max. profits at MRP(L) = MC (L)

Question 7

Formula for MRP(L)?

Answer 7

MR * MPP(L)

Question 8

Give the assumptions of perfect labour markets

Answer 8

Firms operate in a perfectly competitive output market (P = MR)

Firms are wage takers in labour market + workers are wage-takers

Buyers + sellers have complete info.

Entry for workers is ‘free’