elasticity of demand & supply of labour

to determine the elasticity of demand, look at the factors:

  1. PED of a product

elasticity of demand for labour ←→ elasticity of demand for the product

  • if the demand for the product is inelastic, consumers will continue to buy it even if the price increases

  • when the product demand is inelastic, firms can pass on higher production costs to consumers in the form of higher prices

  • as a result, firm is less likely to reduce its demand for labour, making the demand for labour more inelastic

this concept links to the consumer & producer surplus:

  • consumer surplus - difference between what consumers are willing to pay and what they actually pay

  • if firms raise prices due to higher production costs, consumers lose some of their surplus because they have to pay more for the same quantity of goods

  • inelastic goods, consumers surplus decrease (still buy, consider essential)

  • producer surplus - difference between price producers receive and the minimum price they are willing to accept

  • passing on the higher costs to consumers, firms can maintain or even increase in their surplus, as the higher price helps to increase wage costs (inelastic)

graphs:

increase in production costs → supply curve shifts upward

inelastic demand:

  • new equilibrium price raises, reduce consumer surplus but minimise the reduction in producer surplus

elastic demand:

  • price rise → reduction in quantity demanded, reducing producer surplus, reducing total quantity traded in the market

  1. substitutability of labour

  • if labour is easily replaced by other factors of production, demand for labour is more elastic

    • If a factory worker's wage rises significantly, but an automated machine can perform the same task at a lower cost, the employer is likely to invest in the machine instead of paying higher wages

    • the flexibility makes the demand for labour more sensitive to wage changes, increasing its elasticity

  1. proportion of labour cost

  • labour cost constitute a small percentage of total production costs, an increase in wages doesn’t affect the firms’ overall costs → inelastic demand

  1. time period

  • short run - hard to adjust → inelastic

  • long run - adapted → elastic

to determine the elasticity of supply of labour

  1. skills of workforce

  • skilled jobs have lower elasticities than unskilled jobs because it is difficult to attract workers (few have necessary skills)

  1. length of training

  • longer training period, lower elasticity of labour supply

  1. sense of vocation

  • job rewards (not financial) e.g. teaching - inelastic supplies

    • workers are motivated by personal fulfillment/passion rather than wages, less likely to switch jobs → limited responsiveness to wage fluctuations e.g. teaching/nursing/social work

  1. time period

  • short run - supply of labour is more inelastic than long run