The demand for labour, marginal productivity theory

Question 1

Define marginal physical product

Answer 1

The amount of output produced by each extra worker

Question 2

Define marginal revenue

Answer 2

The additional revenue from selling one extra unit

Question 3

Define marginal revenue product

Answer 3

The extra revenue that an additional worker will bring in

Question 4

How do you calculate marginal revenue product (MRP)

Answer 4

MRP(marginal revenue product) =MPP (marginal physical product) X MR (marginal revenue )

Question 5

Describe the marginal revenue product theory (mention what a profit maximising firm will do + what an increase in productivity means for demand for labour)

Answer 5

A rational, profit maximising firm willdemandlabour based on the amount of money it can earn from that labour = calculated using themarginal revenue product of labour (MRP).
- increase in productivity = increase MPP/ MR = increases MRP = firms can hire more workers = demand more labour

Question 6

Why dos the labour demand curve slope down

Answer 6

• As wages increase, hiring workers becomes more expensive and so firms demand fewer workers.
  Vice visa

Question 7

What does elasticity of labour demand tell us

Answer 7

tell us how responsive demand for labour is to changes in wage

Question 8

What elastic labour demand mean

Answer 8

firms are very responsive to changes in wage.
- a small change in wage leads to a bigger percentage change in labour demand

Question 9

What does inelastic labour demand means

Answer 9

firms are unresponsive to changes in wage, even if there is a large increase in wage (only cut demand for labour a little)
- big percentage increase in wage will lead to a smalller percentage change in labour demand

Question 10

State the three factors that affect elasticity of demand for labour

Answer 10

• substitutes
• percentage of total costs
• time
  (P.T.S.D - CROSS OUT D)

Question 11

Factors affecting elasticity of labour demand: state how substitutes affect elasticity of labour demand

Answer 11

• in markets where workers are easy to substitute, demand will be elastic because if workers wanted wages to rise, firms can switch to cheaper capital = demand is very responsive
• In markets where workers are hard to find substitutes for, demand will be inelastic because if wages increase a lot, hard to find a cheaper alternative = firms will keep demanding

Question 12

Factors affecting elasticity of labour demand: state how percentage of total cost affects elasticity of labour demand

Answer 12

• If wages make up a small percentage of total cost, an increase in wage will have a small impact, so demand for labour will be unresponsive/ inelastic
• If wages make up a larger percentage of total cost, an increase in wages will have a large impact, so demand for labour will be responsive and therefore elastic

Question 13

Factors affecting elasticity of labour demand: state how time affects elasticity of labour demand (short run vs long run)

Answer 13

• in the short run when we have no time to search for substitutes, firms will not be able to response much, so demand for labour will be inelastic
• In the long run when we have time to search for subsidies and response properly (responsive) and so demand for labour will be elastic

Question 14

Factors affecting labour demand: define percentage of total cost

Answer 14

what percentage of total cost is made up by workers wages

Question 15

State the 4 factors for shifts in labour demand

Answer 15

• derived demand
• Productivity
• Capital costs
• Education and benefits

Question 16

Shifts in labour demand: define derived demand

Answer 16

demand for a factor of production (like labour) that iscomesfrom the demand of another good/service

Question 17

Shifts in labour demand: state how derived demand causes a shift in the labour demand curve

Answer 17

• labour is a derived demand, meaning the demand for labour comes from the demand for what it produces.
• the higher the demand for the products, the higher the demand for labour.

Question 18

Shifts in labour demand: state how productivity can cause a shifts in the labour demand curve - increase and decrease

Answer 18

• The more productive workers are, the higher the demand for them= can produce more goods and make more profits (INCREASE)
• Firms may demand fewer workers after because they now dont need as many workers to produce all the goods they need

Question 19

Shifts in labour demand: state how capital costs may cause a shift in the labour demand curve + state what capital is substitute to

Answer 19

• as capital gets cheaper, demand for labour decreases
  (Capital and labour are substitutes)

Question 20

Shifts in demand curve: state how education and training can cause shifts in the labour demand curve (both four an increase and decrease in demand)

Answer 20

• Demand for workers will increase because the new education and training will increase the productivity of workwrs. This means each worker will be able to produce more and make firms more profit. So firms will demand more workers (increase)
• if workers become more productive and each worker can produce more , firms mightreducedemand for workers because they need fewer workers to produce the services/ goods they need (decrease)