Demand for Labour (1)

What is the labour market ?

• The labour market is composed of sellers of labour (households) and buyers of labour (firms)

  • Workers supply their labour and firms demand labour

Why is the demand for labour a derived demand ?

• The demand for labour is a derived demand

  • This means that it depends on the demand for goods/services

    • If demand for goods/services increases then the demand for labour will increase - and vice versa

Factors that influence the demand for labour

The price of the product being produced	The demand for the final product
If the selling price of the product increases, it increases the marginal revenue product of labour (Is the extra revenue generated when an additional worker is employed) and the firm will demand more labour Higher priced products incentivise firms to supply more (law of supply) and demand for labour will continually increase with increasing prices	As demand for labour is a derived demand, when an economy is booming, then demand for normal goods/services will be high, and the demand for labour will be high Conversely, when an economy is in a recession (Two or more consecutive quarters of negative economic growth) demand for normal goods/services will be lower, and the demand for labour will be lower
The ability to substitute capital (machinery) for labour	The productivity of labour
Firms will regularly evaluate whether it is more cost-effective to switch production from using labour to capital (machinery) If it is more cost-effective, then demand for labour will fall	If the productivity (output per unit of input used) of labour increases (possibly through training), this will lower average costs, and firms will likely demand more labour

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