Theme 3 Demand And Supply Of Labour Flashcards
Derived demand
When the demand for a good results in demand for another product e.g. labour
Define MPP(L)
The addition to output produced by an extra unit of labour
What’s the law of diminishing returns
When you add a variable factor to a fixed factor, eventually the MP starts to fall
Define MRP
The value of output produced by the last unit of labour added MRP= MPPxMR
What is the marginal productivity theory
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
4 factors that would shift the demand curve for labour
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
Formula for calculating the MP from a table of data
Change in total product/ change in labour
What’s the relationship between work and leisure time
They are substitutes
What is the substitution effect
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
What is meant by the income effect of increasing wage
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
Why might an individuals supply be backwards bending
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
What is the supply of labour also known as
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.
Other than wages identify 3 factors affecting an individuals supply of labour
Potential for promotion.
Job satisfaction
Non-monetary benefits
What does an industry supply curve for labour
Wage and QoL on axis, straight positive linear line
Identify what is meant by non monetary benefits
Rewards that are not cash, such as access to facilities, health insurance, and holiday entitlement.
4 factors affecting elasticity of demand for labour
Availability of capital that could replace labour. Price elasticity of the good. Labour costs as a percentage of total costs, time.
5 factors that would affect the supply of labour
Immigration, improvements in occupational and geographic immobility of labour, requirement for qualifications, welfare/ out of work benefits, wages and conditions in other jobs.
Draw a curve representing the supply of labour to an individual firm in perfect competition
Do it
Draw a curve representing the supply of labour to an individual firm when the labour market is monopsonistic
Do it
Define geographical immobility of labour
When a worker cannot/ will not move from one location to another to take up a job vacancy
What are the causes of geographical immobility
House price differentials e.g. moving from north to London, family ties, children’s schooling, lack of knowledge.
Define occupational immobility
When a worker cannot/ will not move from one profession to another
What are the causes of occupational immobility
Lack of transferable skills, lack of willingness or perceived inability to retain
How does elasticity affect the impact of a NMW
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.
Explain 3 laws that are used to protect workers from monopsony power in labour markerts
-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.
Explain 2 possible solutions to a skills shortage
- pay more to reduce the excess demand
- ‘import’ workers with the skills needed with an active immigration policy encouraging workers with particular skills
Why is youth unemployment more of an issue than unemployment amongst older workers
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
How does increasing the retirement age affect the labour market
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.
How does the compulsory school age affect the labour market
It decreases the supply of labour temporarily as in the first few years less students will be leaving school and entering the labour market.
Define underemployment
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.
How does the induction of zero hour contracts affect labour market equilibrium
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
