The labour market
The demand for labour, marginal productivity theory
The labour market is a factor market. The supply of labour is employees,
whilst the demand is from employers. Labour is a derived demand - comes
from the demand for what it produces.
Demand for labour:
Affected by:
The wage rate:
● The downward sloping demand curve shows the inverse relationship
between wages + number of workers employed
● When wages get higher, firms consider switching production to capital
Demand for products:
● More demand for products, the higher the demand for labour
Productivity of labour:
● More productive - higher demand
● Increased with education + training, and by using technology
Substitutes for labour:
● Cheap to switch to capital - demand for labour will fall
● This will shift the demand curve for labour to the left:
, How profitable the firm is:
● Higher profits - afford more labour
The number of firms in the market:
● This determines how many buyers of labour. If there is only one
employer e.g. NHS, demand for labour is less than if there are many
employers e.g. supermarkets.
● The lower demand for labour can mean wages are lower
The marginal productivity theory of the demand for labour
This theory states that the demand for labour is dependent on the marginal
revenue product (MRP).
MRP is calculated by marginal product x marginal revenue. MRP = MP x MR.
Equilibrium occurs where the marginal cost of one extra unit of labour is
equal to the net benefit of one extra unit of labour. The demand curve
shows MRP.
The determinants of the elasticity of demand for labour
The wage rate + employment is affected by shifting the demand or supply
curve differently, depending on how elastic the other curve is.
If labour demand is inelastic, because there are few or no substitutes, strikes
will increase the wage rate but not affect the employment rate significantly.
A lower supply will lead to a higher increase in the wage rate (P1 P3),
than where there is a more elastic demand (P1 P2).
The demand for labour, marginal productivity theory
The labour market is a factor market. The supply of labour is employees,
whilst the demand is from employers. Labour is a derived demand - comes
from the demand for what it produces.
Demand for labour:
Affected by:
The wage rate:
● The downward sloping demand curve shows the inverse relationship
between wages + number of workers employed
● When wages get higher, firms consider switching production to capital
Demand for products:
● More demand for products, the higher the demand for labour
Productivity of labour:
● More productive - higher demand
● Increased with education + training, and by using technology
Substitutes for labour:
● Cheap to switch to capital - demand for labour will fall
● This will shift the demand curve for labour to the left:
, How profitable the firm is:
● Higher profits - afford more labour
The number of firms in the market:
● This determines how many buyers of labour. If there is only one
employer e.g. NHS, demand for labour is less than if there are many
employers e.g. supermarkets.
● The lower demand for labour can mean wages are lower
The marginal productivity theory of the demand for labour
This theory states that the demand for labour is dependent on the marginal
revenue product (MRP).
MRP is calculated by marginal product x marginal revenue. MRP = MP x MR.
Equilibrium occurs where the marginal cost of one extra unit of labour is
equal to the net benefit of one extra unit of labour. The demand curve
shows MRP.
The determinants of the elasticity of demand for labour
The wage rate + employment is affected by shifting the demand or supply
curve differently, depending on how elastic the other curve is.
If labour demand is inelastic, because there are few or no substitutes, strikes
will increase the wage rate but not affect the employment rate significantly.
A lower supply will lead to a higher increase in the wage rate (P1 P3),
than where there is a more elastic demand (P1 P2).
