Theme 3 Demand And Supply Of Labour

Question 1

Derived demand

Answer 1

When the demand for a good results in demand for another product e.g. labour

Question 2

Define MPP(L)

Answer 2

The addition to output produced by an extra unit of labour

Question 3

What’s the law of diminishing returns

Answer 3

When you add a variable factor to a fixed factor, eventually the MP starts to fall

Question 4

Define MRP

Answer 4

The value of output produced by the last unit of labour added MRP= MPPxMR

Question 5

What is the marginal productivity theory

Answer 5

States that a firm will employ labour up until the point that the MRP of labour is equal to the MC of the extra unit. This is profit maximising

Question 6

4 factors that would shift the demand curve for labour

Answer 6

If the price of the end product increased.
If the MPP increased due to improvement in labour productivity therefore increasing MRP.
A fall in non-wage costs of employing workers e.g. training (labour now cheaper at all price levels)
A decrease in the price of capital that replaces labour, would be a better substitute reducing demand for labour

Question 7

Formula for calculating the MP from a table of data

Answer 7

Change in total product/ change in labour

Question 8

What’s the relationship between work and leisure time

Answer 8

They are substitutes

Question 9

What is the substitution effect

Answer 9

When wages increase it increases the opportunity cost of leisure therefore leisure time is substituted for work. Creating a positive relationship between wage and hours worked

Question 10

What is meant by the income effect of increasing wage

Answer 10

When a worker achieves their target income, any further wage rises will result in increased time taken for leisure, in this case lesiure is a normal good so people will consume more as wages rise, suggesting their is a negative relationship between wages and worked hours

Question 11

Why might an individuals supply be backwards bending

Answer 11

This is when the income effect outweighs the substitution effect of a wage rise, and the individual starts to supply less labour the more wage rises

Question 12

What is the supply of labour also known as

Answer 12

The average cost curve of labour, this shows us how many workers would be prepared to supply their labour at each wage rate and therefore the average wage is equal to average cost.

Question 13

Other than wages identify 3 factors affecting an individuals supply of labour

Answer 13

Potential for promotion.
Job satisfaction
Non-monetary benefits

Question 14

What does an industry supply curve for labour

Answer 14

Wage and QoL on axis, straight positive linear line

Question 15

Identify what is meant by non monetary benefits

Answer 15

Rewards that are not cash, such as access to facilities, health insurance, and holiday entitlement.

Question 16

4 factors affecting elasticity of demand for labour

Answer 16

Availability of capital that could replace labour. Price elasticity of the good. Labour costs as a percentage of total costs, time.

Question 17

5 factors that would affect the supply of labour

Answer 17

Immigration, improvements in occupational and geographic immobility of labour, requirement for qualifications, welfare/ out of work benefits, wages and conditions in other jobs.

Question 18

Draw a curve representing the supply of labour to an individual firm in perfect competition

Answer 18

Do it

Question 19

Draw a curve representing the supply of labour to an individual firm when the labour market is monopsonistic

Answer 19

Do it

Question 20

Define geographical immobility of labour

Answer 20

When a worker cannot/ will not move from one location to another to take up a job vacancy

Question 21

What are the causes of geographical immobility

Answer 21

House price differentials e.g. moving from north to London, family ties, children’s schooling, lack of knowledge.

Question 22

Define occupational immobility

Answer 22

When a worker cannot/ will not move from one profession to another

Question 23

What are the causes of occupational immobility

Answer 23

Lack of transferable skills, lack of willingness or perceived inability to retain

Question 24

How does elasticity affect the impact of a NMW

Answer 24

The more elastic the demand for labour the more unemployment will be created as firms are very sensitive to the wage rate and will decrease the quantity of employee significantly if wages rise. The more elastic the supply of labour is, the more unemployment will be created as the higher wages will attract many more workers, but there will not be demand for them.

Question 25

Explain 3 laws that are used to protect workers from monopsony power in labour markerts

Answer 25

-national minimum wage regulates the minimum amount that a worker can be paid legally.
Dismissal laws make it illegal for firms to sack employees or make them redundant without going through steps such as proving that the job rather than the person is no longer required - they must also pay redundancy wages to help the worker whilst they look for another job.
Discrimination laws prevent firms from paying or treating workers differently based on their gender, ethnicity or sexual orientation.

Question 26

Explain 2 possible solutions to a skills shortage

Answer 26

• pay more to reduce the excess demand

- ‘import’ workers with the skills needed with an active immigration policy encouraging workers with particular skills

Question 27

Why is youth unemployment more of an issue than unemployment amongst older workers

Answer 27

Because if workers do not get employed in their youth they may never work, youths from this will then have little experience and are more of a risk for firms leading to a cycle of unemployment

Question 28

How does increasing the retirement age affect the labour market

Answer 28

It increases the labour supply as there are less people leaving the active labour market and ceteris paribus, the same number entering the market as uni leavers.

Question 29

How does the compulsory school age affect the labour market

Answer 29

It decreases the supply of labour temporarily as in the first few years less students will be leaving school and entering the labour market.

Question 30

Define underemployment

Answer 30

When a worker wants to work more hours than they are given and/or are working in a job which they are over-qualified for.

Question 31

How does the induction of zero hour contracts affect labour market equilibrium

Answer 31

It could lead to underemployment as working are technically in jobs but may be given any hours. Skills may erode as workers are not able to be in training and education, but equally they are not working either.
Reduces job security