The labour market

Question 1

Why is demand for labour considered derived demand ?

Answer 1

Because it is not demanded for its own sake, but as a result for the demand of goods and services.

Question 2

What does the marginal physical product of labour mean ?

Answer 2

The addition to a firm’s total output brought about by employing one more worker. In the short run where factors of production are fixed.

Question 3

Why is the demand curve for the labour market downward sloping ?

Answer 3

Because of the law of diminishing returns where the marginal product of labour falls as you employ one extra worker

Question 4

What is the demand curve for the labour market ?

Answer 4

It is the marginal revenue product of labour MPPL or the MRP

Question 5

What are the axis of the labour market diagram ?

Answer 5

y axis - output or wage rate
x axis - number of workers

Question 6

What is marginal revenue product of labour ?

Answer 6

The money value of the addition to a firm’s total output brought by employing an extra worker

Question 7

How do you calculate the marginal revenue product of labour ?

Answer 7

Marginal product of labour x marginal revenue

Question 8

What factors cause a shift in the labour demand curve ?

Answer 8

1.Labour productivity
2.Technology
3.Changes in price or demand for a product because labour is a derived demand

YOU HAVE TO EXPLAIN THEM - READ Q CAREFULLY

Question 9

How do you calculate the elasticity demand of labour ?

Answer 9

% change in Q for labour / % change in wage rate

Question 10

What factors impact the elasticity of demand for labour ?

Answer 10

1.Labour costs as a % of total costs - if its high then its more elastic

2.The price elasticity of demand of the product - if its elastic then labour is also elastic

3.Ease and cost of factor substitution - if it is difficult to substitute then its inelastic

4.In the long run it is elastic because they are easier to replace but in the short run its is inelastic because it takes time for employers to adjust the method of production.

YOU HAVE TO EXPLAIN THEM !! WHEN THE QUESTION SAYS EXPLAIN FACTORS !!

Question 11

Why is the supply of labour upward sloping ?

Answer 11

1. Substitution effect - a higher hourly wage rate makes work more attractive than leisure so they substitute work for leisure.

2.Income effect - an increase in the hourly wage rate means higher real income and if leisure is a normal good then demand for it increases so quantity of labour decreases.

HOWEVER SUBSITITION EFFECT IS MORE SIGNIFICANT

Question 12

What are the considerations affecting the supply of labour ?

Answer 12

1. pecuniary considerations - financial
2. Non pecuniary - hours, ethos etc

Question 13

What factors shift the supply of labour ?

Answer 13

1.Changes of income - whether leisure is a normal good or an inferior good

2.Changes in population

3.Changes in expectations

Question 14

What factors affect the elasticity of supply of labour ?

Answer 14

1.Supply of unskilled labour is often elastic because training period is very short

2.Factors that increase immobility make supply more inelastic

3.Long run - elastic and short run - inelastic

4.Avaliabity of unemployed labour makes it elastic

Question 15

Why does the MRPL = D in perfectly competitive labour market ?

Answer 15

Because under perfect competition the goods market the MR=AR and this means in the perfect labour market MRPL = MPPL x price which is constant

look at pg 95

Question 16

What are the characteristics of perfect labour market ?

Answer 16

1. Large numbers of workers and employers
   2.Labour and skills are homogenous
   3.Perfect info for workers and firms
   4.Firms are wage takers
   5.No barriers to entry and exit

Question 17

What point do profit maximising firms operate in the labour market ?

Answer 17

When MRPL = MCL
Because if they hire more than that then they are not increasing revenue but costs and if they hire less then they are not maximising their revenue.

Question 18

Define monopsony

Answer 18

One key buyer in a market

Question 19

Define monopsony power

Answer 19

Market power exercised by few buyers

Question 20

Why is the marginal cost of labour twice as steep as the average cost of labour ?

Answer 20

Because if the employer wanted to hire one more worker he would need to increase hourly wage for all other workers which increases total wages. As it is the change in costs from employing one more worker.

Question 21

What do monopsonies do to the labour market ?

Answer 21

Because they hold monopsonist power, at the profit maximising they charge lower wages rate whilst getting the number of workers they need but at a lower price.

Question 22

What are trade unions ?

Answer 22

They use collective barraging with employers to fight for their rights usually higher wages

Question 23

What happens to the supply curve when a trade union enters a perfectly competitive labour market ?

Answer 23

It kinks it to the negotiated price - look at notes

Question 24

What are the effects of a trade union in a monopsony labour market ?

Answer 24

It increases wage rate and employment