Theme 3 - Labour markets

Question 1

what does MRP tell workers and firms

Answer 1

tells firms how many people to employ at a given wage rate
- tells workers whether their pay is good enough if their MRP is at least

Question 2

limitations of MRPL

Answer 2

• its hard to measure productivity
• teamwork makes it difficult to measure individual productive
• the self employed
• we assume that we are working in a perfectly competitive market, may be the presence of monopsonies or trade unions

Question 3

what is the elasticity of labour demanded

Answer 3

measures the responsiveness of labour demanded given a change in the wage rate

Question 4

how does a change in the final price of the product shift the labour demand curve

Answer 4

• if the price of the final product goes up, the MRP of the worker will also go up
• Firms experience increased revenue and profit margins when the final product price rises.
• Higher profitability encourages firms to expand production to maximize profits
• To support higher production levels, firms demand more labor, shifting the labor demand curve to the right.

Question 5

how does the substitutability of capital for labour affect the elasticity of labour demanded

Answer 5

• When capital can easily replace labor, firms are highly sensitive to changes in labor costs.
• A rise in wages significantly increases labor costs.
• Firms respond by substituting labor with more cost-effective capital (e.g., machinery, automation
• This substitution results in a substantial decrease in the quantity of labor demanded, making labor demand more elastic (high responsiveness to wage changes).

Question 6

how does the cost of labour affect the elasticity of labour demanded

Answer 6

• When labor costs are high, firms face significant pressure to manage expenses to maintain profitability.
• High labor costs incentivize firms to find alternative means of production, such as automation or outsourcing, to reduce reliance on expensive labor
• The ability to substitute labor with capital or other inputs means that a small increase in wages leads to a large decrease in the quantity of labor demanded, making labor demand more elastic

Question 7

how does the time period affect the elasticity of labour demanded

Answer 7

• In the short run, firms have limited ability to make significant changes to their production processes or workforce
• Many factors of production, such as capital and contracts, are fixed and cannot be easily altered
• Due to these constraints, the quantity of labor demanded is relatively unresponsive to changes in wages, resulting in inelastic labor demand

LONG RUN:

• Over the long run, firms have more flexibility to adjust their production processes, invest in new technologies, and change their workforce size
• Firms can substitute labor with capital (e.g., automation) and implement more efficient production techniques
• These adjustments make the quantity of labor demanded more responsive to changes in wages, leading to more elastic labor demand