The labor supply Flashcards
what type of demand is demand for labor
Derived demand (derived from the demand for the goods or services)
what Is marginal physical product of labor?
the addition to a firm’s total output brought about by employing one more worker
what Is marginal revenue product of labor?
the extra revenue generated when an additional worker is hired
formula for MRPL
marginal product of labour x marginal revenue
where should a profit maximising firm employ workers up to?
Where MRPL= MCL
what would cause an expansion of demand for labour?
When wages are lower, labour becomes relatively cheap compared to capital therefore a fall in the wage rate might create a substitution effect and lead to an expansion of demand
evaluation of MRPL
- measuring labour efficiency and productivity can be difficult e.g. in education and consultancy
- collaborative work makes it hard to establish productivity of individual worker
causes of shift in labour demand
> change in labour productivity - an increase in productivity increases the MRPL causing demand for labour to increase - can be more cost effective than capital
if demand for good/service that labour produces increases firms may need to take on more workers
a government employment subsidy which allows a business to employ more workers
a change in technology - if technical progress causes firms to substitute capital for labour as it is more productive than labour, demand for labour might decrease. It can also cause technological unemployment as demand for certain types of labour (e.g. software developers) increases whilst demand for other skills fall. - if technical progress makes labour more productive relative to capital, demand for labour is likely to increase.
technical progress can also increase productive and dynamic efficiency causing prices to fall and increased demand for the good or service. This can increase demand for labour.
a change in the cost of technology can also change demand for labour
what is elasticity of demand for labour
the responsiveness of demand when there is a change in the wage rate
formula for elasticity of demand for labour
% change in labour demanded ➗% change in wage rate
what does the elasticity of demand for labour depend on?
> PED for the final product - determines whether firms can pass on higher labour costs to consumers through higher prices
labour costs as a % of total costs - when they are a high percentage labour demand is much more elastic because any change in wage has a much bigger impact on their overall expenses. (a wage increase significantly raises total production)
ease and cost of factor substitution - labour demand is more elastic when firms can easily substitute between capital and labour.
time period - in the long run it is easier for firms to switch factor inputs
what is labour supply
the number of hours people are willing and able to supply at a given wage rate
effect of higher wages on labour supply?
they are assumed to cause an expansion of labour supply e.g. workers previously in this industry might be attracted back. The extent of this expansion depends on the elasticity of supply of labour
to maximise personal welfare, where must a worker supply labour up to?
where: utility of welfare gained for last unit of money earned = utility or welfare from the last unit of leisure time sacrificed.
- At a higher wage rate, the worker would be expected to supply more labour and enjoy less leisure time to maximise personal welfare
causes of an outward shift of labour supply
- net inward migration of suitable qualified workers
- fall in relative pay/ earnings in substitute occupations
- lower entry barriers to particular job
- demographic factors e.g. higher retirement age, younger population
causes of an inward shift of labour supply
- brain drain -> economy loses less skilled workers overseas
- decline in non-monetary rewards associated with the job e.g. increased stress
- fall in relative pay of this occupation compared to other jobs/ rise in minimum qualifications
what is a positive income effect
when higher wages cause people to want to work more hours to reach desired income
what is a negative income effect
when a target income has been reached and people prefer having more leisure time than earning more income
what is the substitution effect
when higher wage increase the opportunity cost of leisure and therefore incentivises people to work longer hours
what determines the elasticity of labour supply
- nature of skills and qualifications required -> lengthy training periods make labour supply wage inelastic and so does specific qualification -> low minimum skills makes pool of available workers bigger and therefore supply labour is more wage elastic
- vocational nature of work -> in strongly vocational jobs e.g. nursing, people are less sensitive to changes in wages
- time period -> in the short tun supply curve for labour tends to be relatively inelastic as it takes time for people to respond to changing wages especially If training is required.
what is marginal cost of labour
the change in total labour costs from employing one extra worker
when are MC and AC different
- if a firm can employ each additional worker at the same wage rate, then MCL = ACL
- however if a firm has to pay higher wages, then the average cost of labour rises and the marginal cost of labour will be above ACL
average cost of labour definition
the total labour cost a firm pays divided by the number of units of labour employed (per worker or per hour)
definition of nominal or current wages
wages unaffected by inflation
