unit 1

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  • Created on: 05-05-14 15:06


Demand and Supply of labour 

In the labour market people from households supply labour and firms demand labour. 

Demand for labour

The demand for labour is known as derieved demand. This means that the deamnd for workers depends on demand for goods and services produced by workers. Businesses will demand labour if demand for goods rises e.g. during an economic boom. 

Factors influencing the demand for labour  

Demand for the final product - Because demand for labour is derieved demand then if the demand for products goes up, then demand for labour will also rise. D shifts R

Relative price of capital and other factors. E.g. if labour costs rise compared to other Factors of production such as equipment then firms are likely to replace labour with capital equipment if they can. 

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Price of products,if the firms products go up in price it acts as a signal to supply more - profit incentive - need more workers and therefore the demand for labour rises. This is because labour is a derieved demand. 

Labour market legislation (regulations) e.g. employment protection laws, maternity/paternity rights. If protection laws are introduced it makes it more expensive and therefore difficult for firmsto hire and fire workers. Demand for labour will fall. 

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Elasticity of demand for labour 

Just like products/services the demand for labour can be elastic or inelastic

If you cannot replace workers with machines very easily. E.g. designer clothing bespoke wedding dresses and then the demand for labour will be inelastic.. because the workers needed are very specialised and it is difficult and lengthening to train them.

If the wages cost are a high proportion of total costs demand for labour would be more elastic, you can find the labour you need relativley easily and try to cut down the cost 

Elasticity of demand for the products itself - PED relativley inelastic demand for labour will also be inelastic, people still demand the product firms therefore demand the labour. 

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Supply of labour

The overall supply of labour depends on the size of working population. Although households supply labour not every person in the household will be working - they may still be at school or retired for example. The working population are those people over school age that are willing and able to work. 

Factors influencing the supply of labour

Net migration. a rise in immigration relative to emigration would cause the supply of labour to rise. 

Real wages of other jobs e.g. if real wages of teachers relative to other professions rose then workers would retrain and supply therefore the supply of labour  to rise - signal and incentive

Non monetary factors e.g. job satisfaction, job security, promotional opportunities, good pensions, hours of work etc, would cause supply of labour to rise

Income tax - a reduction in income tax would encourgae people to seek work; incentive to work signal to firms supply of labour has risen 

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