The Labour Market: Demand and Supply A2 Economics Unit 3
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The Labour Market: Demand and Supply
A2 Economics Unit 3
Aim: • To understand the demand for labour and
marginal productivity theory.Objectives:• Define the labour market.• Describe how the demand for labour has
changed.• Examine the determinants of labour demand.• Analyse MP theory.
Aims and Objectives
Agriculture
Medieval-Industrial Revolution
Industry
Industrial Revolution - Thatcher
Services
Thatcher-Present
1993 2005
Whole Economy 378 519
Financial Services 452 664
Construction 367 470
Energy and Water 495 646
Weekly Real Earnings, UK (Full Time Males, 2005 £)
Provide two points of analysis from the above statistics.
In the Context of the Business Cycle
Why might wage rates have increased more in financial services or energy than in construction?
Demand and Supply for Labour in the Economy
When the demand for a factor of production arises from the demand for the output it produces.
In the labour market the number of workers firms wish to employ depends on the demand for the output which is produced.
Derived Demand
Total demand in the economy for labour.
Depends on the level of economic activity.
In times of economic growth and firm confidence, employment will increase.
In times of slowdown and low confidence employment will fall.
Aggregate Demand for Labour
Aggregate Demand For Labour
Describe what factors may have lead to changes in the employment and unemployment rates over the
time period
Determinants of Demand for Labour
• A rise in wage rates which is greater than a rise in productivity will raise labour costs and contract demand
Price of Labour
• As output per worker increases the more attractive labour becomes.Productivity
• If capital becomes cheaper firms may wish to substitute labour with machinery.
Price of Substitutes
• Increasing N.I. contributions will lead to a fall in demand for labour.
Supplementary Labour Costs
The demand for labour depends on it’s marginal revenue product.
MRP: the value of the physical addition to output arising from hiring one extra worker or F of P.
Where the marginal cost of hiring another worker equals its MRP, the equilibrium qty of labour is established.
Marginal Productivity Theory
The demand for labour depends on it’s marginal revenue product.
MRP: the value of the physical addition to output arising from hiring one extra worker or F of P.
Where the marginal cost of hiring another worker equals its MRP, the equilibrium qty of labour is established.
Marginal Productivity Theory
MP = Marginal Product is the number of extra units of output a firm gains from one extra unit of labour.
MR = Marginal Revenue is the amount of extra revenue generated from one extra unit of labour.
MRP
MRP = MP X MR
Diminishing Marginal Returns
Complete the table
Comment on any relationships you notice
Draw a graph plotting number of workers and MRP.
Comment on any relationships you notice
Plot profit on the same graph and comment.
No Of Workers
Total Product
Marginal Product (Total
Product x - Total Product y)
Marginal Revenue
Marginal Revenue
Product (MR x MP)
Marginal Cost
Total Revenue
Total Cost Profit
1 12 12 5 60 100 60 100 -40
2 26 14 5 70 100 130 200 -70
3 50 24 5 120 100 250 300 -50
4 90 40 5 200 100 450 400 50
5 140 50 5 250 100 700 500 200
6 200 60 5 300 100 1000 600 400
7 254 54 5 270 100 1270 700 570
8 304 50 5 250 100 1520 800 720
9 340 36 5 180 100 1700 900 800
10 358 18 5 90 100 1790 1000 790
11 374 16 5 80 100 1870 1100 770
12 378 4 5 20 100 1890 1200 690
1 2 3 4 5 6 7 8 9 10 11 120
50
100
150
200
250
300
350
-200
0
200
400
600
800
1000
Diminishing Marginal Returns
Marginal Revenue Product (MR x MP)
Profit
No. Of Workers
Mar
gina
l Rev
enue
Pro
duct
Diminishing Marginal Returns
• After the employment of the second worker and up to the employment of the ninth worker, each one adds more to revenue than to cost.
• After the employment of the ninth worker the situation is reversed and each additional employee adds more to costs than to revenue.
• Why does it decrease?
• Profit maximised at 9 people.
Diminishing Marginal Returns
Multiple Choice Questions
Homework
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