| Explain how Demand for Labour is an example of Derived Demand | Demand for Labour comes from Firms, Supply of Labour comes from the Economically Active Population
-Firms need workers to make Goods needed by Consumers. So Consumers demand drives the Demand for Goods that the Labour would make.
-When the demand for the goods Increase, Labour Increases |
| What is the Economically Active Population? | -These are the People in the Economy who are CAPABLE and OLD ENOUGH to work (even if Unemployed or Employed) |
| What does the Marginal Productivity Theory state? | -Demand for a Factor of Production is dependent on the Marginal Revenue Product (MRP) which is the Extra Revenue Gained from employing One more Worker. |
| How is MRP calculated? Why is MRP Important | -MRP requires the Product of the Marginal Physical Product of Labour (MPP, Output made from. The Additional Worker) and the Marginal Revenue (Price per Unit)
-MRP is important as it ways in heavy if Firms will employ More or Less Workers. |
| What is the Marginal Cost of Labour? | -This is the Cost of hiring one more Worker. When the Labour Market is Perfectly Competitive, it is equal to the Wage paid for the Additional Worker |
| What happens when the MRP is
1. Higher than the MC
2. Same as the MC
3. Lower than the MC | 1. When the MRP is higher, the Firm can Bolster Profits by employing more Workers.
2. The Firm shouldn’t Hire or Fire. The Optimal Number of Workers is reached
3. When the MC is Higher, the Workers are costing the Firm too much. The Firm may lay off workers |
| Why is the MRP and MPP curve Downward Sloping? | -The Values on the MRP Curve are = to the MPP Curve multiplied by MR which is Constant (as its the price)
-The Curves being downward sloping reflects the Law of Diminishing Returns - each new worker Employed —> Less Additional Output made |
| Why can Productivity make Firms more Inclined to Demand more? | -Productivity Increases can mean more Output is made per Worker. This in turn lowers Unit Labour Costs (as its spread out.) Therefore more is Made with the Same Cost (if wages don’t Increase.)
-Even if wages increase, the Demand for Labour is unaffected as long as the % of Wage Rise = Productivity. The Unit Labour Cost would still be the Same. |
| What does the Elasticity of Demand for Labour measure? | -Refers to the Change in the Demand for Labour when the Wage Level changes.
-This is achieved by Dividing the Change in Quantity of Labour Demanded by the Change in Wage Rate |
| What does it mean for the Demand of Labour to be
1. Elastic?
2. Inelastic? | 1. Small changes to the Wage Rate lead to Large Changes in the Quantity of Labour Demanded.
2. Large Changes to the Wages Rates leads to Smaller Changes in Quantity of Labour Demanded |
| What factors can influence the Elasticity of Demand for Labour? | -Demand for Labour is more Elastic in the Long Run as Firms can make Plans to Replace Labour (or take more on). In the Short Run, Firms find it hard to make changes so the Demand is more Inelastic
-If Labour is Easily Substituted by Capital, then Demand will be more Elastic
-If Wages are a small % of the firm's Total Cost, then the Demand will be more Inelastic. A Wage Increase will have a Little Impact on Total Costs. The Opposite is True
-Important to Consider the Price Elasticity of Demand for the Product. A More Elastic Demand for the Product makes the Demand for Labour More Elastic. Here, when Wages Rise, Firms can not Pass the Cost to the Consumer by Raising Prices else their Sales Revenue will fall Greatly. |
