3.5.1 Demand For Labour

Question 1

What is the labour market?

Answer 1

The labour market is composed of sellers of labour (households) and buyers of labour (firms).

• Workers supply their labour and firms demand labour

Question 2

What does Derived demand mean?

Answer 2

This means that demand depends on the demand for goods/services

If demand for goods/services increases then the demand for labour will increase - and vice versa

Question 3

4 core factors that influence the demand for labour?

Answer 3

• The price of the product being produced
• The demand for the final product
• The ability to substitute capital (machinery) for labour
• The productivity of labour

Question 4

Explain how the price of the product being produced influences the demand for labour?

Answer 4

• If the selling price of the product increases, it increases the marginal revenue product of labour and the firm will demand more labour
• Higher priced products incentivise firms to supply more (law of supply) and demand for labour will continually increase with increasing prices

Question 5

What is marginal revenue product of labour?

Answer 5

Extra revenue generated when an additional worker is employed.

Question 6

Explain how the demand for the final product influences the demand for labour?

Answer 6

As demand for labour is a derived demand, when an economy is booming, then demand for normal goods/services will be high, and the demand for labour will be high

• Conversely, when an economy is in a recession demand for normal goods/services will be lower, and the demand for labour will be lower

Question 7

Explain how the ability to substitute capital (machinery) for labour influences the demand for labour?

Answer 7

Firms will regularly evaluate whether it is more cost-effective to switch production from using labour to capital (machinery)

If it is more cost-effective, then demand for labour will fall

Question 8

Explain how the productivity of labour influences demand for labour?

Answer 8

If the productivity of labour increases (possibly through training), this will lower average costs, and firms will likely demand more labour

Question 9

Define productivity?

Answer 9

Output per unit of input used.