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

Question 8

where is wage set (industry)(perfect competition)

Answer 8

where demand of labour = supply of labour

Question 9

revenue maximisation on an MRP/ACl diagram

Answer 9

where MRP = MCl (marginal cost labour) or when MRP = wage

Question 10

what is the occupational mobility of labour

Answer 10

the ability of labour to move from one occupation or job to another job

Question 11

what is geographical mobility of labour

Answer 11

the ability of labour to move from one location to another in taking