4.1.6.1 (Demand for labour, marginal productivity theory)

• consumer surplus 


  happens when the price that consumers pay for a product or service is less than the price they are willing to pay
• Derived Demand


  The demand for labour (a factor of production) is derived from the demand for the final product, as firms employ workers to produce the product to meet customer demand.
• What shifts demand for labour?

  1. a rise in consumer demand which means that a business needs to take on more workers
  2. a change in price of the good/service that labour is making
  3. an increase in the productivity of labour which makes labour more cost effective that capital
  4. an employment subsidy which cuts costs and allows a business to employ more workers
  5. a change in the cost of capital equipment / may become a substitute for labour
• if labour workers are more efficiant, then this will most likely increase demand
• if the goods and services labour makes are profitable, demand for labour will increase
• Demand for labour problems


  E1. demand for teachers is based on legal requirement for pupils to be educated

  E2. demand for doctors is based on the derived demand from sick patients

  **in some industries the marginal cost of labour may be hard to quantify so the efficiency, cost and output productivity is harder to measure
• monosopy 


  a market where there is only ONE buyer in the market place, this means that they are the only purchaser of factors and commodities

  • have top down power in dictating the price of goods, services and labour
• Reasons for different elasticity of labour demand

  1. sustainability of labour : if workers can be easily substituted with machines or automation, labour demand tends to be more elastic
  2. proportion of labour costs : in industry where labour costs constitute a large proportion of of total production costs, demand for labour tends to be more elastic
• Elasticity of labour demand

  = measures the responsiveness of demand when there is a change in the wage rate, it depends on:

  • labour costs as a % of total costs
  • ease and loss of factor substitution
  • price elasticity of demand for the final output
• Marginal revenue product of labour (MRPL)

  = the extra revenue generated when an additional worker is employed

  • the demand curve for labour tells us how many workers a business will employ at a given wage rate in a given time period

  * marginal product of labour X marginal revenue *
• MRPL

  • one additional worker will not add more productivity and the cost of hiring / employing one more additional factor of labour will mean marginal labour costs rise
• • MRP > W ( the firm should hire more workers to increase profit )
  • MRP < W ( the firm should hire less workers to increase profit )
  • MRP = W ( then the firm is hiring the optimal number of workers and is maximising profit )