supply + demand for labour Flashcards
what is the definition of supply of labour ?
the supply of labour is determined by those who want to be employed
the total number of hours a worker is willing and able to work at a given wage rate
can also be defined as the number of workers willing and and able to work in a given occupation for a given
what is the demand of labour determined by?
demand for labour is from the employer
Determined by the real wage firms are willing and able to pay for this labour and the number of workers willing to supply labour at this wage
what does it mean when labour is demand derived?
- this means that the demand for labour comes from the demand for what it produces
- For example, the demand for people who make cars is derived from the demand for cars
what is demand for labour related to
demand is related to how productive labour is and how much product is demanded
what is the elasticity of demand for labour linked to?
the elasticity of demand for labour is linked to how price elastic the demand for the product is
what causes movements along the supply and demand curve for labour?
- the wage rate will lead to movements along the supply and demand curves for labour
- all other factors will shift the curve
draw the diagram for demand for labour
why is the curve for demand for labour downward sloping?
shows the inverse relationship between how much the worker is paid and the number of workers employed
what may firms do if wages get higher?
when wages get higher firms may switch production to capital which may be cheaper and more productive than labour
how does demand for products affect the demand for labour?
- the higher the demand for the products, the higher the demand for labour
- since the demand for labour is derived from the demand for products
recall the factors affecting demand for labour
demand for products
productivity of labour
labour substitutability
PED of the product
time frame
labour costs as a % of total costs
how do you calculate the supply of labour?
the number of workers willing and able to work at the current wage rate, multiplied by the number of hours they can work
draw the diagram for supply of labour?
why is the supply for labour curve upward sloping ?
- shows the proportional relationship between how much the worker is paid and the number of workers willing and able to work
the price of labour is the wage rate
recall the factors affecting supply of labour
demographic of the population
migration
Advantages of work
leisure time/ opportunity cost of work
trade unions
taxes and benefits
training/ qualifications
working conditions
immobility of labour
how does the demographic of the population affect the supply of labour and what does it do to the supply of labour curve?
- the more people who are willing and able to work, the higher the supply of labour
- this changes with retirement and school leaving ages, the number of university students and immigration
- it can be illustrated with a shift to the right of the supply curve
how does migration affect the supply of labour?
- migrants are usually of working age so supply of labour tends to increase
- migration particularly affects the supply of labour at the lower wage rates as migrants are usually from economies with average wages lower than the UK minimum wage
how does the advantages of work affect the supply of labour?
- this can influence how much people prefer to work and is linked to non monetary advantages
- if cost of working is lower, so families can afford childcare, people are more likely to work
- if the benefits of working are high e.g holiday entitlements and the potential to be promoted, the supply of labour is likely to increase
how does leisure time affect the supply of labour?
- leisure is a substitute for work
- this is why part time work and early retirements are attractive options for some
- people have to choose whether to spend their time on work or leisure
what factors influence whether people choose whether to spend their time on work or leisure
- age
-amount of taxes paid
-how many dependents the worker has
-income from not working
how do trade unions affect the supply of labour and how can this be evaluated ?
these could attract attract workers to the labour market because they know their employment rights will be defended
Trade unions aim to protect workers by improving working conditions
However if trade unions try to increase the wage rate too high firms may not be able to afford to employ workers
what could be a disadvantage of trade unions on the supply of labour?
the limits on workers, such as limiting their ability to strike, might cause people to withdraw from the labour market
what is the effect of taxes and benefits on the supply of labour?
if taxes are too high and benefits are too generous, people may be more inclined to withdraw from the labour market
what is the effect of training on supply of labour
- if a lot of training or high qualifications are required for a job then the supply of labour may fall
- however if the govt subsidises training, its easer for workers to gain the necessary skills for a job
- so the supply of labour could increas
how may the mobility of labour cause market failure in labour markets?
- the mobility of labour is the ability of workers to change between jobs
- easing of restrictions on mobility of labour increases the supply of labour
This is because workers can easily enter another industry
what is the labour market
a factor market-> labour is one of the key factors of production
households are the suppliers and firms are the demanders
what is the marginal productivity theory
when a firm employs more workers while keeping capital fixed, initially the firm benefits from increasing marginal physical productivity of labour
but then after a while the law of diminishing returns takes over
what is MPPL
marginal physical productivity of labour
this is how many more units a firm can produce by employing one more worker
what is MRPL
marginal revenue productivity
how much extra money is brought in by this extra worker
how can you work out MRP
MPP x MR
draw MPP on a diagram
draw MR on a diagram for the goods market
draw MRP on a diagram in a perfectly competitive labour market
in perfect comp the price of a good equals the MR
wage rate= MR so the MRP- curve is the demand curve for labour
draw the diagrams for MPP, MRP and MR for the goods market and labour market under imperfect competition
we would see MR decline as output rises
therefore MRP would decline more steeply as it depends on both declining MPP and declining MR
what kind of concept is MPP and MRP and what do they show
MPP and MRP are short run concepts
they show output and revenue changes as variable factors of production change but fixed factors remain fixed
in the SR the demand curve is determined by MRP which is determined by MPP and P
what can cause a change in the demand for labour in the SR
in the SR can be caused by either a change in MPP and/or a change in price of the good that the workers are producing
what is the effect of a change in labour productivity on the demand for labour
since demand for labour = MRP then if productivity increases then so does demand
if MR increases this will also increase demand because MRP= MPP X P
so if demand for the product increases, so will price (MR) and therefore the demand for labour
what is the effect of a change in technology on the demand for labour
where technology allows workers to produce more it increases productivity and therefore demand
it can also lead to increase demand for labour by reducing production costs and therefore the price of the good
leads to a greater quantity of the good being demanded and therefore increase the demand for labour
how can you evaluate the idea that changes in technology increases the demand for labour
however where technology provides a cheaper substitute for human labour, this will cause a decrease in demand for labour
changes in technology also causes changes in he labour market as some trades/skills become obsolete and demand arises in new areas
how do you calculate the wage elasticity demand for labour
what is meant by the wage elasticity of demand for labour
an increase in the wage rate paid by firms for labour will lead to a decrease in the quantity of labour demanded (a movement along the demand curve
wage elasticity of demand for labour describes how big a decrease this would be
how do labour costs as a % of total costs affect the wage elasticity of demand for labour
when labour expenses are high as proportion of total costs labour demand is more elastic than a business where foxed costs of capital are the dominant business expense
a firm with relatively few employees is better placed to absorb increase wage costs
how does labour substitutability affect the wage elasticity of demand for labour
labour demand will be more elastic when a firm can substitute quickly and easily between labour and capital inputs
when specialised labour is needed then the demand for labour will be more inelastic
how does the PED of the product affect the wage elasticity of demand for labour
if a firm is operating in a highly competitive market where final demand for the product is price elastic they may have little market power to pass on higher wage costs to consumers through a higher price
the demand for labour therefore may be more elastic as a consequence
however if the PED of the good is inelastic they can pass on the higher costs to consumers
how can time frame affect the wage elasticity of demand for labour
demand for labour will tend to be inelastic in the SR as changes to production methods are unlikely to be instantaneous
more elastic in the long run
it takes time for people to respond to changes in relative wages and earnings especially if they need to be retrained and enter a new occupation
what are the monetary factors that affect the supply of labour
wage rate/salary
bonuses (profit/ share/ commission/ productivity bonuses)
opportunity to boost earnings
wage rates in alternative occupations
what is the substitution effect
in the SR the supply of labour depends on an individuals decision to choose between work and leisure
when wages rise from a low level, supply of labour inc as more people are willing and able to wok for a higher wage to inc standard of living which compensates for their lss of leisure
as wages rise, opportunity cost of leisure inc -> workers have an incentive to substitute more leisure time with work
when is personal welfare maximised
maximised when the worker supplies labour up to the point at which :
utility from the last unit of money earned = utility from the last unit of leisure time sacrificed
at this point, marginal private benefit of receiving extra cash = marginal private cost of losing leisure time
personal preferences determine the value an individual puts on losing leisure time
draw the individual supply curve for labour
what is the income effect
as income increases, the demand for leisure time increases
this leads to a reduction in supply of labour
draw the income effect on a supply of labour diagram and explain why it has this shape
after a point the individual can maintain the same income but working fewer hours at a higher hourly wage rate
in this diagram we assume that the substitution effect dominates
what is the equation for wage elasticity of supply of labour and what is it
% change in Q supplied of labour/ % change in wage rate
this is the measure of proportionately how much the supply of labour changes in response to a change in the wage rate
why is the supply of labour more elastic in low skill jobs
because a pool of labour is available to be employed at a fairly constant market wage rate
whereas jobs which require specific skills and training -> labour supply will be more inelastic
