Demand for Labour

Demand for Labour

1. Downward sloping demand curve

   • Long Run
     • Capital can be substitued for labour
     • firms can vary all FOPs
     • high wage rate
       • firms substitute machines for wokrers
         • Lower demand for labour
   • Short run
     • Law of diminishing returns
     • firms more liely to have an existing stock of capital
       • more workers are added
         • It is less likely that the last one is as productive
           • wage rate would have to fall for more workers to be employed
   • Marginal revenue product
     • The addition to revenue from an extra worker
     • downward sloping as MRP decreases as output increases
       • Shows No. workers the firm will employ at any given wage rate
         • therefore it = the demand curve
     • (MRP)

2. Shifts in the Demand curve for labour

   • SHifts if the MRP changes
     • productibity changes
       • Output per worker
       • employers will be prepared to pay more for workers
     • The price of the good/service changes
       • if price doubles, so will MRP
       • firms will be prepared to pay more for labour

3. Perfect and imperfect competition

   • Thus far has assumed it is a perfectly competitive market
     • firm can supply any quantity at the same Price
     • the MRP curve falls due to diminishing returns
   • Imperfect market
     • faces a downward sloping demand curve
     • If it increases output Price per unit sold falls
     • MRP curve falls
       • because of dimiishing returns
       • price/AR falls as output expands
   • In both markets the demand curve for labour = MRP of labour

4. ELasticity of demand for labour

   • Responsiveness of Qd of Labour to a change in wages
   • Determinants
     • TIME
       • the longer the time period, the easier it is to Substitute labour for other FOPs
       • Short- term
         • firms employ the same No. workers even if WR increases
         • workers have employment contracts
         • financial penalties
         • Inelastic
       • Long-term
         • Firm can buy labour saving machinery
         • changes in methods of work
         • Higher elasticity of demand for labour
           • ELastic
     • Substitutes
       • the easier it is to substitute the greater the response by firms to a change in wages
       • better substitutes
         • Higher elasticity of demand for labour
         • elastic
     • Derived demand
       • if demand for the good is elastic so will the demand for labour
     • proportion of labour costs to total costs
       • larger the proportion of labour cost to total cost, the higher the elasticity of demand for labour
       • a rise in unit labour costs
         • shifts S curve left
         • Fall in Qd
         • the bigger the shift the bigger the fall in D