Th3.5: Factors Affecting PED of Labour

Question 1

What are the four factors affecting PED of labour?

Answer 1

directly correlated to the price elasticity of demand for the product
proportion of wages to the total cost of production
substitutes
time

Question 2

Directly correlated to the price elasticity of demand for the product

Answer 2

if the good is elastic, then a rise in wages and hence a rise in prices for consumers will have a large impact on the quantity the business sells - this means that the business will reduce the number of people it employs in order to help make a profit

Question 3

Proportion of wages to the total cost of production

Answer 3

if wages are a huge proportion of costs, then an increase in wages will increase costs massively and so there will be a large fall in demand for labour hence it will be elastic

Question 4

Substitutes

Answer 4

if there are many substitutes, machinery e.t.c, then the demand will be elastic - this means high skilled jobs tend to be more inelastic than low skilled jobs as the labour cannot be easily replaced

Question 5

Time

Answer 5

in the long run, it is more elastic as machinery can be developed and jobs can be moved whilst in the short run firms have to employ workers and redundancy payments can be expensive

Question 6

What is PED of labour?

Answer 6

the responsiveness of the quantity demanded of labour to the wage rate