3.6.1 - The Demand for Labour

Question 1

What is a factor market?

Answer 1

A market in which factors of production are bought and sold.

Question 2

What type of market is the labour market?

Answer 2

A factor market.

Question 3

What are the factor markets?

Answer 3

Markets for:
Land
Labour
Capital
Enterprise

Question 4

Who supplies the labour in the labour market?

Answer 4

Households.

Question 5

Who demands the labour in the labour market?

Answer 5

Businesses.

Question 6

How do factor markets differ from goods markets?

Answer 6

The firms demand the factors and households / other businesses supply them.

Question 7

Why is the labour market important to the goods market?

Answer 7

The labour creates goods that businesses sell.
The labour is paid for their services meaning they can purchase goods from other businesses.

Question 8

What do households require to exercise demand?

Answer 8

An ability to pay for the good. (income)
A willingness to pay for the good.

Question 9

How do most households make income?

Answer 9

Selling their labour services in a labour market.

Question 10

How can you draw the relationship between households and firms?

Answer 10

In a circular manner.

Question 11

What is derived demand?

Answer 11

Demand for a good / factor of production, not wanted for its own sake, but as a consequence of the demand of something else.

Question 12

Why do firms demand labour?

Answer 12

They produce goods which increases their profits.

Question 13

What is a requirement for long run employment of labour?

Answer 13

Assuming firms are profit maximising, the outputs produced must be sold for at least a normal profit in the goods market.

Question 14

What is the marginal physical product of labour?

Answer 14

The addition to a firm’s total output brought about by employing one more worker.

Question 15

What is a synonym of marginal physical product of labour?

Answer 15

Marginal returns of labour.

Question 16

What does MPP_L measure?

Answer 16

The amount by which a firm’s total output rises in the short run (holding capital fixed) as a result of employing one more worker.

Question 17

What does this graph show?

Answer 17

The laws of diminishing marginal returns of labour when capital is fixed.

Question 18

What could be said about this graph?

Answer 18

The MPP_L is always decreasing whenever one more employee is hired.
This contrasts with other theories that marginal returns are a parabola that increase before decreasing.

It could be argued that this graph is even further simplified over a parabolic marginal returns graph that more closely resembles the real world.

Question 19

What is the marginal revenue product of labour?

Answer 19

The monetary value of the addition to a firm’s total output brought about by employing one more worker.

Question 20

How can you convert a marginal physical product graph to a marginal revenue product graph?

Answer 20

Multiply the marginal physical product by the MR of the good.

Question 21

If the MPP_L of a worker is 5, and the MR is £25, what is the MRP_L of the worker?

Answer 21

£125.

Question 22

In a perfectly competitive market, what can be said about the MR of a good relative to its price?

Answer 22

They are equal and horizontal.

Question 23

What are the equations for MRP_L?

Answer 23

MPP_L * MR = MRP_L

(under perfect competition) MRP_L = MPP_L * price

Question 24

What happens to the MRP_L a good is sold in an imperfectly competitive goods market rather than a perfectly competitive goods market?

Answer 24

The MRP_L will decrease much faster as the MR from selling an extra worker’s output also falls as output increases.

Along with this, firms have a downward sloping demand curve and therefore has to reduce the price of the product in order to sell the extra output.

Question 25

What does the demand curve for labour show?

Answer 25

The relationship between wage rate and number of workers employed.

Question 26

What happens to labour employment when wage rates are low?

Answer 26

The firm hires more labour.

Question 27

Where is the market demand curve for labour when there is more than one employer in a market?

Answer 27

The market demand curve is shifted to the right by some factor of the individual firm.

Question 28

What can be said about the relationship between these two graphs?

Answer 28

The curve on the right is equal to the sum of each individual firms demand for labour on the left.

Question 29

Why is there a shift in market demand curves for labour?

Answer 29

A change in labour productivity.
A change in technology.
- Technical progress making labour more productive relative to other factors.
- Technical progress making labour less productive relative to other factors.

A change in marginal revenue.

Question 30

Why is a change in labour productivity a reason for market demand curve for labour to shift?

Answer 30

A firm’s demand curve is the MRP curve of labour facing the firm. If labour productivity increases, MRP also increases, so more labour is demanded at each wage rate, and market demand is shifted to the right.

Question 31

Why does a change in technology (making labour more productive relative to other factors) cause the market demand to shift to the right?

Answer 31

If technology improves to make labour more efficient, or technology degrades making production more labour intensive, firms are likely to substitute labour for other factors of production, making the demand curve for labour shift to the right.

If technology improves, productive and dynamic efficiencies are also likely to improve, reducing the cost of making the product. If this leads to lower costs and higher demand, the demand of labour increases.

Question 32

Why does a change in technology (making labour less productive relative to other factors) cause the market demand to shift to the left?

Answer 32

As technology improves, it may cause automation to become more viable. This means that firms can produce for 24 hours a day with no wage costs, making capital far more productive relative to labour and thereby causing the market demand for labour to shift to the left.

However, if we divided the demand for labour into high MRP and low MRP, we may see the demand for high MRP workers increase at the expense of low MRP workers as they need engineers to fix and make new automated machines.
(This is known as technical unemployment, and is a type of creative destruction)

Question 33

What is technical unemployment?

Answer 33

Workers with low MRP are replaced by capital which can work continuously.

Question 34

What is the elasticity demand for labour?

Answer 34

The proportionate change in demand for labour following a change in the wage rate.

Question 35

What is the equation for elasticity of demand for labour?

Answer 35

Proportionate change in quantity of labour demanded / proportionate change in the wage rate

Question 36

Why are particular types of labour relatively inelastic?

Answer 36

When relevant wage costs form such as small part of total production costs (the importance of being unimportant).
When the demand for a good / service is inelastic.
When it is difficult to substitute other factors of production for the labour currently employed.
In the short run, rather than the long run, it often takes time for employers to adjust the method of production.

Question 37

Why is there currently a massive labour shortage in the fruit picking industry?

Answer 37

There have been marked improvements in labour markets in Eastern Europe. (unemployment falling in Bulgaria, Romania etc.)
Brexit brought about uncertainties for EU workers who moved back to their home countries.
Incredibly low appetite for British workers to pick fruit.