The Labour Market

Question 1

How do we measure the extra revenue gained from the extra person hired in gaining extra output?

Answer 1

MRPL (Marginal Revenue Product of Labour) = MPL x MR

Question 2

How do we measure the extra revenue gained from extra capital?

Answer 2

MRPK (Marginal Revenue Product of Capital) = MPK x MR

Question 3

What is the cost of hiring extra units of labour?

Answer 3

Wages

Question 4

What is the rental cost?

Answer 4

The interest rate of obtaining capital, plus depreciation

Question 5

How far will firms hire extra labour?

Answer 5

As long as the marginal product of labour (MPL) is greater than the wage; will maximise profits until wages = MPL

Question 6

How far will firms obtain extra capital?

Answer 6

As long as the marginal product of capital is greater than the rental cost; until the cost of capital = MRPL

Question 7

What is the MRPL for a price taker?

Answer 7

MRPL = MPL x P (because MR = P)

Question 8

There is an _____ relationship between the wage rate and the amount of employment the firm will offer

Answer 8

Inverse; when wages decrease, firms will want to hire more people and vice versa

Question 9

What determines the prevailing wage rate?

Answer 9

Labour demand and labour supply; market demand for labour is the total amount of labor that firms in the market wish to employ; the market supply of labour is the total amount of labour that households are willing to offer to firms in the market

Question 10

What is the equilibrium wage rate?

Answer 10

The wage rate that balances firms’ demand of labour and workers’ supply of labour

Question 11

What happens to the MRPL when more labour is employed?

Answer 11

It falls because the MPL declines as employment rises

Question 12

Why might the labour supply curve for skilled labour be steeper?

Answer 12

Because the marginal productivity of labour MPL is greater (low supply + high productivity = higher wages)

Question 13

Why might the labour supply curve for unskilled labour be flatter?

Answer 13

Because the MPL is smaller (high supply + low productivity = lower wages)

Question 14

What impact does unionisation have?

Answer 14

It restricts employment and raises the wage rate

Question 15

Wages in each sector of the economy are determined by what?

Answer 15

The interaction of labour demand and supply

Question 16

What does the GDP (aggregate output) of an economy depend on?

Answer 16

How much labour is available, how much capital equipment is available, and how much technology we have access to

Question 17

What is the aggregate output of the economy?

Answer 17

The sum of all the different sectors of activity

Question 18

In the short run, the MPL dY/dL is ______

Answer 18

always positive, but declines as L rises

Question 19

Another way to calculate the MRPL is:

Answer 19

dY/dL x P

Question 20

The profit maximisation point in the economy is:

Answer 20

(dY/dL) x P = W OR dY/dL = W/P

Question 21

How do we calculate the labour force?

Answer 21

Working age population x participation rate

Question 22

Why will the labour supply always be smaller than the labour force?

Answer 22

Due to voluntary, frictional and structural unemployment

Question 23

What happens when there is a reduction in the labour supply?

Answer 23

This will generate a lower level of employment - the real wage will rise because firms are competing for a smaller amount of labour, and this means a fall in output (GDP) because of the reduced availability of labour

Question 24

What would happen if real wages were pushed above the equilibrium level?

Answer 24

Firms would cut the number of people they are employing

Question 25

In the long run, why might the labour market change?

Answer 25

Population growth and changes in the participation rate

Question 26

In the long run, how might capital stock rise?

Answer 26

If there is net investment (in excess of depreciation)

Question 27

What happens to prosperity if there is more employment in creating output?

Answer 27

It would decline because the MPL would decrease - prosperity in terms of output per person would decline if the sole source of prosperity was increasing the labour force

Question 28

How might the average wage level of the economy be raised?

Answer 28

Increased production from a larger labour force, enhanced by capital accumulation and technology

Question 29

When labour productivity is enhanced by K or A rising/improving, what happens to the labour demand curve?

Answer 29

It moves to the right because the MPL is higher at every employment level

Question 30

What did Malthus predict?

Answer 30

That population growth would outstrip any improvements in productivity in agriculture, and that living standards (wages) would eventually fall to a bare minimum subsistence level; technological innovation would cause output and productivity to rise arithmetically, but the population would rise geometrically

Question 31

According to Malthus, what would prevent an exponential population growth that was a strain on resources?

Answer 31

Misery (war and plague), vice (birth control) or moral restraint (late marriage)