Topic 16-The demand and supply of labour

Question 1

What does low price of labour mean for the demand of labour

Answer 1

Firms will demand more of it than when it is high

Question 2

Demand for labour curve

Answer 2

Wage cost | .
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Quantity of labour

Question 3

Factors influencing the elasticity of demand for labour

Answer 3

• labour costs as a percentage of total costs
• substitutes
• labour costs as a percentage of total costs
• capital will tend to be inflexible in the SR
• The elasticity of demand for the final product

Question 4

Factors which influence the demand for labour

Answer 4

• demand for final product
• price of capital (substitutes)
• the productivity of labour
• price of a product>higher price would encourage firms to increase their demand for labour as making more of a profits for, higher prices
• labour market regulations

Question 5

Supply of labour curve

Answer 5

Wage cost | .
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| .
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|______________
Quantity of labour

Question 6

Participation rate

Answer 6

• Supply of labour depends on this

- the proportion of the population of working age who are in employment or seeking work

Question 7

High wage rates lead to

Answer 7

Increase in the supply of labour as real wages rise more incentive for unemployed to accept jobs

Question 8

Factors which influence the elasticity of supply for labour to a particular occupation or industry

Answer 8

• skills,acquisition and experience required: if these are high supply of labour= Inelastic
• level of unemployment if unemployment is high then supply is likely to be more elastic

Question 9

Factors causing a shift in the supply curve for labour

Answer 9

• Net migration: a rise in immigration relative to emigration would cause a right shift in the supply curve
• the real wage in other occupations: lead to an increase in supply of workers in the occupation which has had a rise in real wages
• income tax rates:reduction in income tax rate>encourage people to go into work
• increase In benefits/job seekers allowance>fall in supply of labour
• improvement in working conditions

Question 10

Demand of labour

Supply of labour

Answer 10

People needed to work by firms

People available and ready to work who look for jobs themselves

Question 11

Derived demand

Answer 11

Demand which is dependant on the demand for a product

Question 12

Minimum wage

Answer 12

A government set a minimum wage rate below which firms are not allowed to pay workers

Question 13

Benefits of minimum wage

Answer 13

• People won’t be paid less than they deserve for the job they are doing therefore can’t exploit workers
• if minimum wage is low it doesn’t cost a lot for firm
• encourages firms to train workers as they cost more
• reduces voluntary unemployment if high

Question 14

Costs of minimum wage

Answer 14

• if minimum wage is too high costs for firms will be too high and therefore they are less likely to hire workers
• decrease productivity because workers know they’re getting paid the minimum wage
• may not be enough to live on

Question 15

Factors influencing the demand for labour:

• demand for the final product
• Productivity of labour

Answer 15

• Derived demand>if there is high demand for a product firms will want the workers that make the product (increasing in demand for labour right shift)
• if labour becomes more productive then this will lead to an increase in the demand for labour

Question 16

Factors influencing the demand for labour:

• profitability of firms
• substitutes
• labour market regulations

Answer 16

• if firms are profitable, they can afford to employ more workers>demand for labour is high
• if labour is costing the firm more than substitutes e.g machinery would, the firms are likely to replace labour with capital.
• laws are put into place making it more difficult to hire and fire workers demand for labour will decrease

Question 17

Factors influencing the elasticity for the demand for labour

• labour costs as a percentage of total costs
• substitutes

Answer 17

• when labour costs are a high proportion of total costs>demand for labour is more elastic.
• EVAL:in some capital-intensive manufacturing activities labour may only take up a smaller share of total production costs.
• If other factors of production such as capital (machinery) can be substituted for labour>elastic

Question 18

• capital will tend to be inflexible in the SR

- The elasticity of demand for the final product

Answer 18

• if a firm faces an increase in wages, it may have little flexibility in substituting towards capital in the short run, so the demand for labour may be relatively inelastic.
• elastic demand for goods>firms will not be able to pass on high wage costs to consumers through higher prices and demand for labour will be elastic.

Question 19

Effects of government intervention

Answer 19

-Unemployment benefits:
lowering unemployment benefits>^supply of labour
Eval: this policy needs to be balanced against the need to provide protection for those who are unable to find employment&cant be lowered to a point where people do not quit their job to find new ones.
-Incentive effects:
High income tax>low supply of labour as some people may not want to pay high taxes