THE LABOUR MARKET ECONOMY LEVEL OCCUPATION LEVEL INDIVIDUAL FIRM

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Damon Campbell
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1 THE LABOUR MARKET ECONOMY LEVEL OCCUPATION LEVEL INDIVIDUAL FIRM

2 DEMAND FOR LABOUR IS DERIVED DEMAND Derived demand: occurs when the demand for a factor of production arises from the demand for the output it produces

3 AGGREGATE DEMAND FOR LABOUR Aggregate demand for labour (economy level) depends principally on the level of economic activity national output and expectations

4 THE INDIVIDUAL FIRM S DEMAND FOR LABOUR

5 WHAT FACTORS AFFECT THE INDIVIDUAL FIRM S DEMAND FOR LABOUR? The price of labour Any increase in wage rate which exceeds productivity gains will mean an increase in unit costs and mean less labour can be purchased with the same budget Movement up and down the existing D curve Productivity As output per worker increases the more attractive labour becomes The price of other factors of production If capital (a substitute product) becomes cheaper firms may try to substitute workers for machines Supplementary labour costs E.g. increasing employers NI contributions will lead to a fall in demand as costs will increase All of these will lead to a change in the QD at all wage rates and thus lead to a shift of the D curve

6 MARGINAL PRODUCTIVITY THEORY Theory of Marginal Productivity: the key theory underpinning the demand for labour States that demand for labour depends on their Marginal Revenue Product (MRP) MRP = MP X MR Where MP = Marginal Product and MR = Marginal Revenue I.e.. The additional product/output the worker brings multiplied by the selling price (marginal revenue) the additional revenue the additional worker contributes Equilibrium will be established where MC of 1 extra unit of labour = the MRP, i.e. net benefit of adding extra workers have been exhausted

7 D CURVE FOR LABOUR = MRP Wage Rate/MRP MC 2 MC 1 MRP=D As a firm takes on more workers initially the MRP rises due to team work, specialisation and the division of labour Beyond a certain level MRP begins to fall due to diminishing returns (overloading of a fixed factor) With perfect competition in the labour market the firm is a price taker and will recruit labour at a constant wage rate irrelevant of how many workers they recruit (e.g. 100 for 1 week of labour), giving a horizontal MC line Quantity of Labour Equilibrium is established where MRP=MC

8 TABLE 7.1 ON PG 77 Up to worker 9 each worker adds more to revenue than they do to costs because MRP>MC Profit is maximised with 9 workers

9 PROFIT MAXIMISATION Wage Rate/MRP MC 2 MC 1 MRP This graph shows the quantity of labour demanded at each wage rate The MRP is the D curve MC = the wage rate i.e. The cost of 1 more worker The firm will operate where MRP=MC because every worker up to that point will contribute more to revenue than to costs Quantity of Labour MRP=MC is the point of profit maximisation for the firm

10 TAKE NOTE Wage Rate/MRP MC = S MRP = D Don t confuse the horizontal MC line with the MR line on previous graphs On previous graphs the MR line has been horizontal as the firm has sold every product at the same price irrelevant of how many they re sold price taker in perfect competition. The MR curve has been the D curve. When looking at the individual firm s demand for labour the MRP is the D curve and MC is constant if there is perfect competition in the labour market, resulting in a constant cost for a unit of labour irrelevant of how many units of labour they employ Quantity of Labour MC is the S curve and when these 2 intersect an equilibrium is formed

11 SHIFTS IN THE D CURVE FOR LABOUR MRP = MP X MR The D curve will shift to the right if MRP increases Based on the formula, what 2 factors can cause an increase in MRP? What would increases in these 2 variables look like in real terms? Increase in MP Possible causes... Increase in MR Possible causes...

12 A SHIFT IN THE D CURVE Either MP or MR has increased, increasing MRP Wage Rate/MRP D 2 = MRP D 1 = MRP Demand for car assembly workers will increase if productivity of car assembly workers increases, perhaps as a result of training Demand for car assembly workers would also increase if there has been an increase in demand for cars (derived demand), pushing up the market price (marginal revenue) of cars Quantity of Labour

13 A SHIFT IN THE D CURVE Wage Rate/MRP D 2 = MRP Either MP or MR has increased, increasing MRP MRP = MP X MR D 1 = MRP Quantity of Labour

14 EVALUATION Measuring MRP can be quite difficult in reality Teamwork means that it is often impossible to assign each worker an output they are solely responsible for creating (the marginal product) For people who work in the tertiary sector it is also difficult to measure output as they provide services rather than physical goods

15 ACTIVITY PAGE 78 Copy and complete table Answer questions

AP Microeconomics Chapter 12 Outline

AP Microeconomics Chapter 12 Outline I. Learning Objectives In this chapter students will learn: A. The significance of resource pricing. B. How the marginal revenue productivity of a resource relates to a firm s demand for that resource.