Labour Flashcards
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How will firms make their demand decisions for labour?
They will use the marginal revenue product
What is MRP?
This is the extra revenue generated when an additional worker is hired.
Why is there an inverse relation between wages and demand for workers?
In the short run it is due to the law of diminishing marginal returns. As quantity increases the MRP decreases. This is due to fop becoming more used up.
In the long run at higher wage rates, firms will realise its more cost effective to hire capital than labour.
Factors which can affect demand for labour?
Changes in the final price of the product being made
Changes in the demand for the final product
Changes in labour productivity
Changes in the price of capital
What does the elasticity of labour measure?
It measures the responsiveness of labour demanded given a change in the wage rate.
What can determine the elasticity of the labour?
Substitutability of capital for labour. Easy substitution = elasticity
Elasticity of demand for the product. If demand for final product is inelastic then so is wages.
Cost of labour as a percentage of total cost. The higher the more elastic demand is going to be.
Time period. In the short run, it tends to be inelastic. Difficult to bring in capital
