What is a firm?
An organisation that brings together factors of production in order to produce output
Why is labour an example of derived demand?
derived demand is demand for a good or service that arrises due to the demand of a different good or service.
Labour is not demanded by a firm for its own sake, but rather because of the ouput it produces.
What is the relationship between demand for labour and the wage rate?
Inverse relationship, as labour gets more expensive.
What is the demand for labour determined by?
The Marginal revenue product of labour
What is the marginal revenue product of labour?
The extra revenue a firm gains from employing an additional worker, it depends on a workers marginal physical product as well as the marginal revenue of the last good sold.
What is the formula of MRPL?
MRPL = MPP X MR
What is the Definition of Marginal Physical Product (MPP)
This is the extra output that an extra worker produces.
Due to the law of diminishing returns, in the short run, there is usually a diminishing marginal product when increasing the number of workers.
What is marginal revenue?
The additional revenue a firm gains from selling an additional unit of output. Marginal Revenue (MR) It is closely related to the price of the good sold, and hence the demand for the good. If a good increases in demand, it pushes up the price and therefore, the firm will be willing to pay more to employ labour.
How does a firm determine how many workers it will employ?
As the firm is assumed to be profit maximising, it will higher up until MRPL=MC oL, as this is the point where the revenue a worker brings in is equally offset by the cost the firm bears for hiring them.
What factor would cause a movement along the demand for labour curve?
A change in the wage rate, as different amount of labour is now demanded despite the MRPL staying the same.
What factors would lead to a shift in the demand for labour curve?
Any facotr which can change MRPL:
* A change in labour productivity, possibly due to technological advances or increases in education
* Demand for the product - if demand increases, price will increase, which will increase the marginal revenue of the goods sold.
* If capital becomes cheaper, demand for labour may fall
What is elactisity of the demand for labour?
The sensitivity of a firms demand for labour following a change in the wage rate.
What factors influence the elacitisity of the demand for labour?
- Proportion of labour costs as a % of final costs - firms will react more to a small change in the wage rate if labour makes up a signifcant proportion of final costs, as a small change will make a larger difference to final costs
- availability of substitutes - if labour can easily be substituted for capital, than a rise in wages will cause the firm to switch to atuomation
- The PED of the final produuct sold - if the good is price inelastic, the firm can easily pass on the increase in wages without losing sginificant revenue, making demand more elastic
- Time - in the long run, the elactisity of demand for labour is more elastic as it can be substituted for capital.
What is the key choice for an indivudal when deciding to supply their labour?
Whether to work, or wether to enjoy leisure time
What are the two affects which determines the shape of the individual supply curve of labour? What shape is it?
The income effect and the substitution affect
It tends to be backwards bending
What is the substitution affect?
As wages increase, the opportunity cost of leisure time increases, which provides an incentive to work. This effect is always positive.
What is the income effect?
As wages increase, workers may reach a target income in which they will begin to encourage the consummption of goods and services, including leisure. This is positive at the start but negative at a certain point. causing the supply of labour to bend backwards.
Why is the supply curve of labour upward sloping?
As wages increase, workers will move from other industries or from economic inactivity, as the incentives for working in this indsutry have increased.
What factors affect labour supply?
- The number of qualified people - if more people are qualified, supply will be more responsive to changes in the wage rate
- Difficulty of obtaining a qualification- if the qualifications required to enter the industry are high, workers will be less able to join the work force to immediately take advantage of the increase in wages, so supply will be more inelastic
- Non wage factors - location, working hours, working enviroment etc… - more pleasent jobs will attract more people at lower wages
- Immigration - an increase in the size of the workforce will mean there are more people willing and able to work at any given wage rate
- Wages on offer in substitute industries
Why will the wage rate for a firm in a perfectly competitive labour market be horizontal?
It must accept the wage rate set by the market, as it has no wage setting power. Thus, the wage rate will remain the same as it can also not wage discriminate. Therefore, MC = AC = S
What is georaphic immobility of labour?
When labour struggles to move spatially, and this limits their ability to seek new employment opportunities
What can cause geographic immobility of labour?
- Emotional and social connections to your region
- differences in housing cost
- poor quality infrastructure which makes commuting harder
What has been the root cause of structural immobility of labour?
global shift and deindustrialisation.
