econ theme 3

what is a derived demand

demand for a good or FOP is a consequence of demand for something else

• eg. labour is demanded because of good/service they make

what is demand for labour

number of workers firms are willing and able to employ at given wage

demand for labour curve

how does wage rate affect demand of labour

higher wage rate → costs for firms increase → less likely to hire workers → lower demand for labour

• vice versa

how does demand for product affect demand for labour

increase demand for product increases demand for labour that makes product

how does price of product affect demand for labour

price increase → marginal revenue product of labour increases → increased demand for labour

how does change in technology affect demand for labour

new technology becomes available → fall in demand for labour

• labour is a substitute for capital

  • businesses choose cheaper option

how does price of other inputs affect demand for labour

increase in price of raw materials/overhead → increases costs → reduced demand for labour

how does productivity affect demand for labour

productivity rises → firms more profitable → increased demand for labour

how does legislation affect demand for labour

increase in NMW → decrease in employment

• eg. legislation making it easier to hire/fire workers

what is MRP

marginal revenue product

• additional revenue gained when extra unit is produced by adding an additional worker

how do you calculate MRP

marginal revenue x marginal product

what is total product

total sum of output produced by given number of inputs over period of time

what is marginal product

number of extra units of output produced by additional factor input

what is marginal revenue

additional revenue brought in when additional product is sold

when do firms determine the number of employees to employ

when MRP = marginal cost of labour

what is the law of diminishing marginal returns

variable FOP is added to fixed FOP → productivity increases increases initially → decreases after certain point

what is the reason for diminishing marginal returns

• labour is variable while capital is fixed

• initially there is increase bcs of division of labour → more efficient → more output

• new worker learns from older worker

MRP graph

what are the features of a perfectly competitive market

• many workers

• labour is homogenous

• perfect information

• firms are wage takers

• no barriers to entry

what is the implications of many workers

• more production

• lower wage rate

what is homogenous labour

identical skill set/qualifications across the labour force

what is the implications of a homogenous labour force

addresses occupational immobility

what is the implications of having perfect information

• addresses geographical immobility

• workers know cost of labour → cannot be exploited

what is the implications of firms being wage takers

wage has to be at market equilibrium

perfectly competitive labour market graph

what is supply of labour

number of people willing and able to supply working hours at given wage rate/given time

supply of labour curve

how does wage rate affect supply of labour

higher wages → more incentive to work → higher supply of labour

• vice versa

how do comparative wage rates affect supply of labour

higher comparative wage rates in substitute labour markets → lower supply of labour

• vice versa

how do birth and death rates affect supply of labour

determines future labour supply

how does training affect supply of labour

determines how many people are employable

how does training period affect supply of labour

long training periods are a barrier of entry

how does level of welfare benefits affect supply of labour

higher level of benefits → less incentive for low-skilled workers to supply their labour

• vice versa

how does income tax affect supply of labour

at certain level, income taxes disincentivise households from offering labour

how does trade union power affect supply of labour

workers consider benefits of joining them

eg. determine wage rates and incentive to work

how do changes in migration policy affect supply of labour

policy increases net migration rate → supply of labour increase

what are the other factors which affect the supply of labour

• income

• working conditions

• legislation

• benefits of future education

• optimism about pensions

• social trends

what is geographical immobility

ease with which workers can move around country and find work

what causes geographical immobility

• house prices (rent is more expensive in South - sometimes unaffordable)

• family/social ties

• higher percentage of home ownership → excess demand for property in South → PES of homes is inelastic

• lack of information

• infrastructure

what policies affect geographical immobility

• improving transport links (address problem of family ties and prevents people selling homes → excess supply of homes → prices fall)

• relaxation of planning laws

• increasing construction of social housing

• housing subsidies for key workers where house prices are high

• improving operation of job centres

eg. HS2, remove stamp duty, right to buy scheme, maximum rent, lifetime ISAs

what is occupational immobility

ease with which workers are able to change jobs

what causes occupational immobility

• de-industrialisation

• insufficient education/training/skills/work experience

what policies affect occupational immobility

• training schemes

• increasing provision of further education

  • ie. vocational courses for school leavers

• increasing provision of higher education

  • ie. tertiary courses specific to market needs

backwards bending supply curve

what is the analysis of the backwards bending supply curve

increases in wages brings up hours worked up until target wage is met

• when wages high → workers want to work less

what is the substitution effect

rise in real wage increases opportunity cost of leisure → incentive to work longer

what is the positive income effect

wages increase → work more → increase income to meet target income

what is the negative income effect

target income is met → work less (even if wages increase) → want to enjoy leisure time

what is wage elasticity of demand for labour

measures responsiveness of quantity demanded for labour given change in wages

what is the reasons for wage differentials

• skills/qualifications/experience

• discrimination - gender/race/nepotism

• location

• age

• national minimum wage

• type of work - compensating wage rate (ie. radiologist)

• exploitation

• elasticity of job

• MRP

• monopsony power

• profits of firm

• bargaining power

what is minimum wage

wage rate set by govt above market equilibrium that must be paid by law to employees

what is the economic impact of minimum wage

• increases quantity supply of labour → due to substitution effect and positive income effect

• increases business costs → demand for labour decreases → demand for capital increases

  • depends on labour intensity and initial cost of capital increases

    • benefit of not paying wages is felt in the long-term

• excess supply of labour (unemployment)

what are the advantages of minimum wage

• incentive to work

• increases productivity → workers feel compensated for labour

• reduces relative poverty and inequality

• increases MPC with positive multiplier effect

  • lowest income earners have higher MPC and lower MPS

• insignificant job losses

what are the disadvantages of minimum wage

• increases business costs → reduces profits → fall in firm investment

• firms are less competitive → increased prices

• reduced working hours → decreases productivity

• increases unemployment in long-term → reduced job creation → disincentivises new firms due to costs

  • may cause poverty

• increases cost-push inflation → wage-price spiral

• affects young, unskilled and low productivity jobs

  • however demand for youngest workers is higher as costs are lower

what is the maximum wage

wage ceiling imposed by govt set below market equilibrium wage

what is the economic impact of maximum wage

• decreases quantity supplied of labour → less incentive to work especially for high-skilled workers → human-capital flight

• decreases business costs

• increases quantity demanded of labour → excess demand → increases employment

  • depends if labour is cheaper than quality

what are the advantages of maximum wage

• helps decrease inflation rates → prevents wage-price spiral

• limits inequality by narrowing income gap

• reduces labour costs for firms → lower prices → benefit for consumers

what are the disadvantages of maximum wage

• reduction in productivity → no incentive to work hard

• reduces supply of labour → high skilled workers incentivised to emigrate → reduced skill set in economy

• unfair (normative)

what factors affect wage elasticity of demand for labour

SECT

how does substitutability of capital for labour affect wage elasticity of demand for labour

if high → labour is elastic

• (vice versa)

what does the substitutability of capital for labour depend on

• if a sector is labour intensive → inelastic

  • (vice versa)

• productivity of machinery

• cost of machinery

• improvement in technology

how does elasticity of product sold affect wage elasticity of demand for labour

if product is PED inelastic → still need to produce → labour is inelastic

(vice versa)

how does cost of labour as percentage of total cost affect wage elasticity of demand for labour

if high → firms more likely to get rid of workers when wages increases → labour is elastic

• (vice versa)

how does time period affect wage elasticity of demand for labour

• inelastic in short-term

• elastic in long-term as technology improves

what is the wage elasticity of labour supply

measures responsiveness of labour supplied given change in wage rate

what factors affect wage elasticity of labour supply

• nature of skills required

• nature of job

• time

how does the nature of skills required affect wage elasticity of labour supply

lots of skills/qualifications needed → high barriers to entry → labour is inelastic

ie. length of training period

how does the nature of job affect wage elasticity of labour supply

when job is not enjoyable and wages fall → elastic

• (vice versa)

how does time affect wage elasticity of labour supply

inelastic in short -term

elastic in long-term

• effected by contracts like notice periods

what is a monopsony

market structure dominated by one main buyer of labour (employer)

• ie. govt, NHS

what are the problems with monopsonies

• monopsonist has wage setting power

• exploits workers

• no incentive to improve working conditions

• restrict job availability → purposely employs less than what market needs → excess supply of labour → no wage bargaining power

what are the benefits of monopsonies

national minimum wage fixes it by making the wage setter a wage taker and it makes employment

what are the solutions to monopsonists

• national minimum wage

• trade unions