Supply And Demand For Labour

Question 1

What is the supply of labour?

Answer 1

Those who are willing and able to supply their labour to a particular industry, supply of labour to particular occupations is affected by monetary + non-monetary factors.
Non-monetary factors include:
- job satisfaction + dissatisfaction
- working conditions

Question 2

What does the supply of labour curve show?

Answer 2

The relationship between the wage rate and number of workers willing and able to work in an occupation
- low wage rate = supply of labour is low
- high wage rate = supply of labour is higher

Question 3

What are some factors that can increase the supply of labour?

Answer 3

• improvements in working conditions
• decrease in working conditions in alternative industries
• gov incentive schemes
• improved training and opportunities for development and progression
• increase in immigration
• government promotion/advertisement
• increase in the number of workers in the population as a whole

Question 4

What are some factors that can decrease supply of labour?

Answer 4

• worsening of working conditions
• improvement of working conditions in alternative industries
• decreased immigration
• a fall in total population
• a gov benefits scheme introduced which reduces incentives to work

Question 5

What is derived demand?

Answer 5

Demand for one item depending on the demand for another item
- the number of workers a firm wishes to employ depends upon the revenue that can be earned from what it produces

Question 6

What are some of the factors that influence the demand for labour?

Answer 6

• demand and expected future demand for the products and the revenue that can be eared from output
• productivity, the higher the output per worker, the more attractive labour is as a resource
• wage rate - if wages increase at a faster rate than labour productivity- D for labour will contract
• complementary labour costs (e.g. national insurance contributions)
• the price of alternative factor inputs (other factors of production) - e.g. capital - machinery, etc

Question 7

What is marginal revenue product of labour (MRPL)?

Answer 7

It measures the change in total revenue for a firm from selling the extra output produced by extra worker employed
- marginal physical product is the change in output resulting from employing one extra worker
MRPL = Marginal Physical Product (MPP) x Price per unit

Question 8

What does the MRPL diagram assume?

Answer 8

A constant wage rate of W (MC of L), with a curved MRP of L curve
- at this wage rate, when the MC of L curve crosses the MRP of L curve, workers will be employed - it is the profit maximising level of employment

Question 9

What are some limitations to the MRPL theory?

Answer 9

• assumes measuring productivity is possible
• assumes that workers are homogenous
• assumes wage rates are constant

Question 10

What is the elasticity of demand for labour?

Answer 10

Elasticity of demand for labour measures the responsiveness of demand for labour when there is a change in the wage rate

Question 11

What are some factors that affect the elasticity of demand for labour?

Answer 11

• labour costs as a % of total costs - when labour expenses are a high proportion of total costs, then labour demand tends to be elastic
• the ease and cost of factor substitution - labour demand will be more elastic when a firm can substitute quickly and easily between labour and capital inputs
• the price elasticity of demand for the final output produced by a business - if a firm is operating in a highly competitive market, where final demand for the product is elastic, they may have little market power to pass on higher wage costs to consumers

Question 12

What is elasticity of supply of labour?

Answer 12

It measures the responsiveness of supply of labour when there is a change in the wage rate.

Question 13

What are some factors affecting the elasticity of supply of labour?

Answer 13

• length of training period
• difficulty/skill level required

Question 14

What are some of the increases in demand for labour?

Answer 14

• increase in demand for the good or service leads to an increase in the derived demand of labour
• if an alternative factor of production (capital/machinery) increases in price, leading to substitution of labour for capital
• if the MRP of labour increases due to; increases in productivity, or if there is a rise in the selling price of the product.

Question 15

What are the decreases in demand for labour?

Answer 15

• if demand for the good or service falls, there will be a corresponding fall in the derived demand for the labour producing that product
• if alternative factor inputs become cheaper
• if the MRP decreases due to a fall in the price of the product or a drop in productivity

Question 16

How are wages determined by the forces of supply and demand?

Answer 16

• if wages are too high, supply is greater than demand and there is a surplus of labour in the industry (unemployment). Wages must be cut to eliminate this, so as the wage rate falls, there will be fewer workers willing and able to supply their labour to that industry, contracting supply. Lower wages will also lead to an extension along the demand for labour curve, as more workers will be demanded at a lower wage
• if wages are too low, there will be shortages. Firms will realise they have to increase their wages to attract workers to their industry. Higher wages will lead to more people being willing and able to supply their labour to that industry, extending the supply of labour. At higher wage rates, firms will demand less workers