The Labour Market: Demand & Supply - Unit 3 (AQA)

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Economics ­ The Labour Market: Demand & Supply (8.11.12)
Demand for Labour
Derived Demand:
The demand for labour (factor of production) arises from the demand for the output
that it produces
The number of workers that a firm employs depends mainly on the demand for the
output produced
A rise is demand = firm employing more people
Aggregate Demand for Labour (Total demand in economy):
Depends principally on the level of economic activity
Economy Growing & Firms confident of continued growth = Employment levels
National output falls or grows slower, Firms will be less confident about levels of AD
in the future = Employment levels fall
Individual Firm's Demand for Labour:
In addition to the demand for the output produced, the number of workers that firm seeks
to employ is determined by a number of factors:
Price of Labour ­ A rise in wage rates that exceeds any rise in labour productivity =
Rise in unit labour costs = contraction of demand for labour
Productivity ­ As output per worker, per hour increases = more attractive labour
Price of other Factors of Production ­ Capital becomes cheaper = firms substitute
some of their workers with machines
Supplementary Labour Costs ­ For example, increasing employers NI contributions =
Fall in demand for labour (Makes it more expensive for employers)

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Marginal Productivity Theory
Demand for workers depends on their Marginal Revenue Product (MRP)
The MC of taking on an additional unit of labour = MRP
MRP = Change in total output arising from hiring one more worker
The equilibrium quantity of labour employed will be established
Short Run:
Firm takes on more workers = Output rises (Because of increasing returns, due to
benefits of division of labour = Increase in Marginal Product)
The Marginal Product of Labour = Number of extra units of output a…read more

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Shifts in Demand Curve for Labour:
Shift to the right:
If MRP of Labour Increases (will come about if the MP of labour and/or the MR
The demand for car assembly workers will increase is the productivity of car
assembly workers rise ­ could be as a result of increased training, if the price of their
output rises due to an increase in demand for cars)
The Elasticity of Demand for Labour:
>A measure of the responsiveness of the quantity demanded of labour to…read more

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Factors that Determine Elasticity of Demand for Labour:
In the long-run it is easier to substitute labour for other factors of production or vice
In the short-run firms may not have enough time to reorganise their operations ­
will have the employ the same number of workers even if wage rates increase
Workers have contracts of employment ­ firms will have to make redundancy
Over time, firms could buy labour-saving capital equipment and reorganise their
working methods = reduction is labour
Elasticity…read more

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Elasticity of Demand ­ Labour:
The Supply of Labour:
Consists of all of those that are economically active (In work or actively seeking work)
The Participation Rate or Activity Rate is the percentage of the population of working age
that is economically active
The Supply of Labour to a particular occupation:
The number of people willing to work in a particular occupation is influenced by monetary
and non-monetary factors.…read more

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Adam Smith ­ "Net Advantage"
Overall reward, taking into account monetary and non-monetary factors should be equal
across the various industries in which a particular occupation could be practiced
Occupations with satisfying non-monetary features may have a higher supply at a
given wage ­ potential employees would be prepared to work for a relatively low
Occupations with less satisfying non-monetary characteristics may have a lower
supply at a given wage ­ the monetary rewards must therefore be higher to
compensate for this
The Supply…read more

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The Elasticity of Supply of Labour:
Measures the responsiveness of the quantity of labour supplied to a change in the real
wage rate; it will vary from industry to industry
Elastic = Small change in wage rate = Large change in quantity of labour supplied
Inelastic = Small change in wage rate = Small change in quantity of labour supplied
Elasticity of Supply of Labour = % Change in Quantity of Labour Supplied
% Change in Wage Rate
The Elasticity of Labour Supply depends upon…read more

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Comprehensive notes on the factors affecting the demand for and supply of labour including marginal productivity theory. About 8 pages in length.

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