12 Questions
What is the term for the demand for factors of production, such as labour, that is derived from the demand for the product they are used to make?
Derived demand
What is the theory that states a firm's demand for labour depends on the productivity of additional units of labour?
Theory of marginal revenue productivity
What is the term for the additional revenue generated by employing an additional unit of labour?
Marginal revenue product
What is the curve that shows the relationship between the wage rate and the number of workers employed?
MRP curve
What is the effect of an increase in labour productivity on the demand for labour?
Increase in demand for labour
What is the effect of an increase in the wage rate on the demand for labour?
Decrease in demand for labour
What would be the likely effect on the demand for labour if employers' national insurance contributions increase?
A decrease in the demand for labour
What is the name of the concept that measures the responsiveness of the quantity of labour demanded following a change in the wage rate?
Elasticity of demand for labour
Which of the following would lead to an increase in the elasticity of demand for labour?
An increase in the elasticity of demand for the good or service
What determines the shape of the supply curve for labour?
Both monetary and non-monetary factors
What would be the likely effect on the demand for labour if the price of capital equipment decreases?
A decrease in the demand for labour
What is the term for the phenomenon where labour is substituted with other factors of production, such as capital machinery?
Ease of substitution
Study Notes
Derived Demand
- The demand for factors of production, such as labor, is derived from the demand for the product they are used to make.
- Example: An increase in demand for foreign holidays increases the derived demand for airline pilots.
Marginal Productivity Theory
- The demand for labor is also known as the theory of marginal revenue productivity (MRP).
- MRP is the addition to a firm's revenue from employing an additional unit of labor.
- MRP = Marginal Physical Product (MPP) x Marginal Revenue (MR) obtained in the market for the firm's product.
- In a perfectly competitive product market, MR is constant, and the gradient of the MPP and MRP curves will be the same.
Determinants of Labour Demand
- Wage rates: Higher wages lead to a contractionary movement along the demand curve for labor.
- Labour productivity: An increase in output per worker per hour increases demand for labor.
- Price of substitute factors: A decrease in the price of capital equipment leads to a reduction in demand for labor.
- Other labour costs: An increase in employers' national insurance and pension contributions leads to a decrease in demand for labor.
Elasticity of Demand for Labour
- Elasticity of demand for labor is a measure of the responsiveness of the quantity of labor demanded following a change in the wage rate.
- The formula is: Elasticity of demand for labor = (Change in quantity of labor demanded / Change in wage rate) x (Wage rate / Quantity of labor demanded)
- Factors determining the elasticity of demand for labor include:
- Ease of substitution: The easier it is to substitute labor for other factors of production, the more elastic is the demand for labor.
- Time: The longer the time period, the easier it becomes to substitute labor with other factors, making demand for labor more elastic.
- Elasticity of demand for the good or service: If the elasticity of demand for the good or service that workers produce is inelastic, then the demand for labor will also be inelastic.
- Proportion of labor cost to total cost of production: The larger the proportion of labor cost to total cost of production, the greater the elasticity of demand for labor.
Supply of Labour
- The supply curve for labor shows the relationship between the wage rate and the number of workers willing and able to work in a particular occupation.
- The supply of labor to a particular occupation is influenced by:
- Monetary factors: Wage rate
- Non-monetary factors: ...
Understand the concept of derived demand and marginal productivity theory in microeconomics. Learn how the demand for labour is influenced by the demand for products and services. Test your knowledge of labour demand and its determinants.
Make Your Own Quizzes and Flashcards
Convert your notes into interactive study material.
Get started for free
