Chapter 6 : The labour market

Question 1

Explain the relationship between households and firms in the goods and labour markets.

Answer 1

• In goods markets finished goods and services flow from firms to households who spend their income on these goods
• In labour markets members of households earn their incomes they spend on goods by selling labour to employers

Question 2

What is derived demand?

Answer 2

Derived demand is that the demand for factors of production is derived from the demand for the product they are used to make.
Ex. Demand for airline pilots increased as the demand for overseas holidays increase

Question 3

What is (MPPL) marginal physical product of labour?

Answer 3

The additional output derived from employing one more worker.

Question 4

What is (MRP) marginal revenue of productivity?

Answer 4

The additional revenue to a firms total revenue after employing additional factors of production.

Question 5

What is the formula for marginal revenue productivity of labour?

Answer 5

MRPL = MPP X MR

Question 6

What are the determinants of labour demand ? Explain them.

Answer 6

• Wage rates
  
  • Wages are the price of labour so higher wages will lead to a contraction wry movement on demand for labour curve
• Labour productivity
  
  • Output per worker per hour increases their labour is more valuable which leads to an increase in demand for labour
• Price of substitute factors
  
  • If (ex) capital machinery becomes cheaper then the demand for labour decreases
• Other labour costs
  
  • If employers national insurance and pensions increase then demand for labour falls

Question 7

What does a change in wage rate cause to the demand for labour curve compared to a change in other factors?

Answer 7

• A change in the wage rate causes a movement along the demand for labour curve
• A change in other factors causes a shift in the demand curve for labour

Question 8

What is the elasticity of demand for labour?

Answer 8

The elasticity of demand for labour measures the responsiveness of the quantity demand for labour following a change in the wage rate.

Question 9

What are the factors that determine the elasticity of demand for labour? Explain them.

Answer 9

• Ease of substitution
  
  • The easier it is to substitute labour the more elastic demand is
• Time
  
  • The longer time period the easier it is to substitute labour for other factors of production so the demand for labour is elastic
• Elasticity of demand for good or service
  
  • Labour has derived demand so if demand for goods is inelastic the demand for labour is also inelastic
• Proportion of labour cost to total cost of production
  
  • The larger the proportion of labour cost to total cost of production, the greater the elasticity of demand for labour

Question 10

What does the supply curve for labour show?

Answer 10

It shows the relationship between the wage rate and the number of workers willing and able to work within a particular occupation.

Question 11

What are the determinants of the supply of labour?

Answer 11

• Wage rate
  
  • Since wages are the reward for labour as wages increase this causes an extension across the labour supply curve
• Size of the working population
  
  • As the size of the working population increases this increases the potential of the supply of labour
• Non-monetary factors
  
  • Different types of jobs yield different types of job satisfaction and dissatisfaction
    Ex. working conditions, job status, job security

Question 12

What is net advantage?

Answer 12

Net advantage refers to workers that take into account monetary and non-monetary advantages of the job before choosing to supply their labour.

Question 13

What is the elasticity of supply of labour?

Answer 13

The elasticity of supply of labour measures the responsiveness of the quantity of labour supplies following change in the wage rate.

Question 14

What is the formula for the elasticity of supply of labour?

Answer 14

Elasticity of supply
of labour = % change in the quantity of labour supplied / % change in wage rate

Question 15

What are the factors that determine the elasticity of the supply of labour?

Answer 15

• Time
  
  • The longer the time period the more ELASTIC the supply of labour becomes as it gives workers more time to complete education and training and find an occupation
• The length of training period
  
  • A job that requires a long training period or significant relevant experience the supply of labour will be INELASTIC
• Vocation
  
  • In a job/occupation which the purpose of the job is vocational meaning to make a difference (e.g. teachers) the supply of labour tends to be INELASTIC and may not change significantly in response to the wage rate changing

Question 16

What are wage differentials?

Answer 16

The difference between the wages of some groups of workers. As some earn more and others earn less. This can be explained by elasticities and factors.

Question 17

What is the average cost of labour?

Answer 17

Average cost of labour = total wage costs/ number of workers employed

Question 18

What is the marginal cost of labour?

Answer 18

The addition to a firms total cost of production after employing an additional unit of labour.