Chapter 7 - The labour market: Supply & demand

Demand for labour
1. Derived demand - the demand for labour is derived from the demand for the good/service produced
2. Determinants of a firms demand for labour
  1. Price of labour
  2. price of capital
  3. productivity
  4. supplementary labour costs - e.g training, NI contributions
3. Demand curve for labour
  1. Derived from Marginal Revenue Product curve
  2. =MRP curve from max onwards
    1. MRP=MPP*P
  3. Firm doesnt demand before max because wage> MRP
  4. Shifts - MRP changes, MPP or P changes
  5. Elasticity of demand curve - Q before you P -
    1. Determinants
      1. Time period - short term inelastic, long term elastic
      2. Availability of substitutes. easier to replace with capital = more elastic
      3. Elasticity of demand for the product
      4. Proportion of labour costs to total costs, higher the proportion the higher the elasticity, as costs will be hit harder when recruiting
Supply of labour
1. Individual supply - Offer curve
  1. Income effect - leisure becomes more affordable, trade more work for leisure
  2. Substitution effect, trade off leisure for work
  3. I>S, I=S , I<S
2. To an occupation
  1. Determinants
    1. Monetary
      1. Wage/Salary
      2. Commission
      3. bonuses
    2. Non-monetary
      1. working conditions
      2. convenience
      3. hours required
      4. job security
      5. job satisfation
3. To a firm
  1. Determinants
    1. Availability of training for labour
    2. Location of firm
    3. Level of unemployment, low unemployment =skills shortage
    4. Opportunities for overtime work
  2. Supply curve
    1. Same as normal curve, S=net advantage
    2. Elasticity - %changesupplied/%wagechange
      1. Determinants
        Skills/qualifications needed in the job
        length of training period
        sense of vocation(suitability felt by a person), higher this sense, more inelastic
        time period - short term inelastic, long term inelastic

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Chapter 7 - The labour market: Supply & demand

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