1. Labour Markets - Labour Demand & MRP (Individual)

Question 1

What is demand for labour?

Answer 1

Demand for labour is the number of workers firms wish to employ at a given wage rate in a given time period.

Question 2

Who demands labour and who supplies labour?

Answer 2

Firms demand labour and workers supply it.

Question 3

What type of demand is demand for labour?

Answer 3

Demand for labour is derived demand - it stems from the demand for goods and services.

Question 4

What do firms base their demand decisions for labour on?

Answer 4

Marginal Revenue Product (MRP) - the extra revenue generated when an extra worker is hired

Question 5

How do you calculated MRP?

Answer 5

MRP = MP (Marginal Physical Product) x MR (Marginal Revenue)

Question 6

What are the axis for an MRP curve graph?

Answer 6

On a MRP diagram wage and output are on the y axis with quantity of workers on the x axis

Question 7

What is the shape of an MRP curve and why?

Answer 7

An MRP curve has an almost upside down v-shape. This is because it rises initially as the firm specialises and excess resources are exploited, but eventually starts to decline and slope downwards as the Law of Diminishing Marginal Returns kicks in.

Question 8

What else does the MRP curve represent and why?

Answer 8

The MRP curve is also the demand curve for labour - this is because it fits the criteria; it shows how many workers a firm would hire at a given wage rate.

Question 9

How can you work out the marginal cost of labour from the MRP curve and the number of workers that would be hired? (assuming rationality & perfectly comp.)

Answer 9

You look at the wage rate (given to you) then read across on to the MRP curve - the point directly below where MRP = W is the number of workers the firm will hire and the horizontal line between the wage rate on the y axis and the MRP curve = marginal cost - this is because each worker costs the same so MRP = horizontal line.

Question 10

Up to what point will firms hire workers?

Answer 10

Firms will hire workers up until the MC of labour is = the MR of labour

Question 11

Why do firms employ up to where MC=MR?

Answer 11

Because if they produced below MC=MR they’d be inside there potential - they could earn more if they hired another worker - profit maximise - if they produced beyond MC=MR they’d be making a loss on each worker - the revenue they bring in < the wage you pay them