Section 7: The Labour Market Flashcards
What is derived demand
The demand for a good or service that results from the demand for a different, or related, good or service
What type of demand is the demand for labour and explain how
Derived demand
Demand for labour is driven by the demand for goods
What is the marginal productivity theory
Says that a company will pay a worker based on the value that they contribute to the company
What does the marginal productivity theory say in relation to factors of production
The demand for any factor of production depends on its marginal revenue product
What is the marginal revenue product of labour
The extra revenue gained by the firm from employing one more worker
What is the marginal physical product of labour
The output produced by the additional worker
What is the marginal cost of labour
The cost of hiring one additional worker
In a perfectly competitive market what is the MC equal to
MC = wage paid to the additional worker
In a perfectly competitive market how is the wage decided
Firm can’t affect the wage
It will be the market equilibrium wage (where supply equals demand)
What is the equation for marginal revenue product of labour
MRP(L) = MPP(L) x MR
Why is the MPP(L) curve the same shape as the MRP(L) curve
Because the MRP(L) is just the MPP(L) multiplied by marginal revenue
Explain the shape of the MPP(L) curve
It is downwards sloping because of the law of diminishing returns
As each new worker is empoyed the amount of additional output that’s produced falls
What are unit labour costs
The labour costs per unit of output
What happens if the productivity of a worker rises the same as the wages
The wages stay the same
Why might an increase in labour productivity not increase a company’s competition
If it helps other firms too
For example, new technology
What curve is equivalent to the MRP(L) curve
The demand curve for labour
Give three examples of something effecting the MRP curve and, in turn, also effecting the demand curve for labour
If demand falls for product then price falls, this would decrease the firm’s demand for labour and the MRP(L) curve would shift to the left
Factors that affect labour productivity
Increases to the cost of labour
What are the two types of demand for labour
Inelastic
Elastic
What is the elasticity of demand for labour
It measures the change in demand for labour when the wage level changes
What is the equation for the elasticity of demand for labour
% change in quantity of labour demanded/ % change in the wage rate
Give 4 factors that can effect the elasticity of demand for labour
More elastic in the long run - firms can make plans for the future to replace labour and in the short run changes are more diffiicult to make
If labour can be substituted easily by capital it is elastic
If wages are a small proportion of a firm’s total costs it will be more inelastic and vice versa
The price elasticity of demand is important - the more price elastic the demand for the product is then the more elastic the demand for labour will be because if wages rise firms aren’t able to pass the increase in costs to consumers
What are the two things that labour supply could be referring to
Individual labour supply - total number of hours which that person is willing to work at a given wage rate
Occupation - the labour supply is the number of workers willing to work in that occupation at a given wage rate
In the short run what does the labour supply depend on
Depends on the individual’s decision to choose between work or leisure
Explain what happens to the quantity of labour supplied if the wage rate increases
It increases
People are prepared to work more hours as the wage rate increases (there’s a limit to this)
Although there is a limit high wages will attract more workers to an occupation
