1. Labour markets – Demand and Supply

2. Demand for labour Demand for labour is from the firm….
DL is downward sloping in the LR as you can be replaced by machines!
DL is also downward sloping in the SR based on the ToDR (production theory)
MRP (Marginal Revenue Product) is the ‘value’ you bring to business. The greater the MRP the greater your value = greater the D for L will be
MRP holds true in all markets
So….MRP is the DL curve for a firm
MRP = MPP (Q) x Price of Product
Working out the MRP tells a firm where to stop hiring
The DL curve can shift like a normal D curve if MPP improves (productivity improves) or the price of the good increases (can get more revenue back for cost of labour employed)
PeD for L is determined by time, close subs, PeD for the product and % of labour costs to TC

3. Demand for labour - notes

4. Return of the margin 1 – using MRP to work out how many people you will hire2 3 4 5 6 7
Labour hired
Total output (units)
MPP (units)
P of Product
(£)
MRP (3x4)
Wages per
Contribution (£)
(calc 5-6) 8 10 70 17 25 32 38 43
MPP = number of extra units firm gets from hiring next person
MRP = the extra revenue the next person hired give a firm
Contribution = the extra revenue the next person gives a firm – the cost of paying the extra person
Complete the table so every cell is calculated
Indicate by circling the following on your table:
Where diminishing marginal returns starts to set in
Where the firm will stop hiring
If the firm could now pay £50 wages what would change?

5. Return of the margin 1 – using MRP to work out how many people you will hire2 3 4 5 6 7
Labour hired
Total output (units)
MPP (units)
P of Product
(£)
MRP (3x4)
Wages per
Contribution (£)
(calc 5-6) 8 10 80 70 17 9 90 20 25 32 38 60
-10 43 50
-20
MPP = number of extra units firm gets from hiring next person
MRP = the extra revenue the next person hired give a firm
Contribution = the extra revenue the next person gives a firm – the cost of paying the extra person
Complete the table so every cell is calculated
Indicate by circling the following on your table:
Where diminishing marginal returns starts to set in
Where the firm will stop hiring
If the firm could now pay £50 wages what would change?

6. Return of the margin 2 – using MRP to work out how many people you will hire1 2 3 4 5 6 7
Labour hired
Total output (units)
MPP (units)
P of Product
(£)
MRP (3x4)
Wages per
Contribution (£)
(calc 5-6) 8 9 72 17 25 32 38 43
MPP = number of extra units firm gets from hiring next person
MRP = the extra revenue the next person hired give a firm
Contribution = the extra revenue the next person gives a firm – the cost of paying the extra person
Complete the table. Two market conditions have changed: Price of your product has reduced as competitors reduced their prices and wages have increase as a new minimum wage level is introduced
Indicate by circling the following on your table where the firm will now stop hiring?
What has changed in the model? What can this tell us about how firms react to market condition changing? How does it affect unemployment?

7. Return of the margin 2 – using MRP to work out how many people you will hire1 2 3 4 5 6 7
Labour hired
Total output (units)
MPP (units)
P of Product
(£)
MRP (3x4)
Wages per
Contribution (£)
(calc 5-6) 8 9 72 17 81 25 32 63 -9 38 54
-18 43 45
-27
MPP = number of extra units firm gets from hiring next person
MRP = the extra revenue the next person hired give a firm
Contribution = the extra revenue the next person gives a firm – the cost of paying the extra person
Complete the table. Two market conditions have changed: Price of your product has reduced as competitors reduced their prices and wages have increase as a new minimum wage level is introduced
Indicate by circling the following on your table where the firm will now stop hiring?
What has changed in the model? What can this tell us about how firms react to market condition changing? How does it affect unemployment?

8. Return of the margin 3 – decisions in an imperfect market (Q2 Page 331)4 5 6 7
Labour hired
Total output (units)
MPP (units)
P of Product
(£)
MRP (3x4)
Wages per
Contribution (£)
(calc 5-6) 10 15
150 60 24 14 36 12 44 11 50 53 9 27
MPP = number of extra units firm gets from hiring next person
MRP = the extra revenue the next person hired give a firm
Contribution = the extra revenue the next person gives a firm – the cost of paying the extra person
Complete the table.
Indicate by circling the following on your table where the firm will now stop hiring?
What has changed in the model? What can this tell us about how firms react to market condition changing? How does it affect unemployment?

9. Return of the margin 3 – decisions in an imperfect market (Q2 Page 331)4 5 6 7
Labour hired
Total output (units)
MPP (units)
P of Product
(£)
MRP (3x4)
Wages per
Contribution (£)
(calc 5-6) 10 15
150 60 90 24 14
196
136 36 12
144 84 44 8 11 88 28 50 53 9 27
-33
MPP = number of extra units firm gets from hiring next person
MRP = the extra revenue the next person hired give a firm
Contribution = the extra revenue the next person gives a firm – the cost of paying the extra person
Complete the table.
Indicate by circling the following on your table where the firm will now stop hiring?
What has changed in the model? What can this tell us about how firms react to market condition changing? How does it affect unemployment?

10. Return of the margin 4 – decisions in an imperfect market (Q2 Page 331)5 6 7
Labour hired
Total output (units)
MPP (units)
P of Product
(£)
MRP (3x4)
Wages per
Contribution (£)
(calc 5-6) 10 15
150 30 24 14 36 12 44 11 50 53 9 27
MPP = number of extra units firm gets from hiring next person
MRP = the extra revenue the next person hired give a firm
Contribution = the extra revenue the next person gives a firm – the cost of paying the extra person
Complete the table.
Market conditions change. Wages can now be paid at £30 as you have moved to Indonesia
How does this change the model? What can this tell us about how firms react to market condition changing? How does this margin analysis directly affect unemployment in countries?
However, what does this model NOT tell us though about the two countries?

11. Return of the margin 4 – decisions in an imperfect market (Q2 Page 331)5 6 7
Labour hired
Total output (units)
MPP (units)
P of Product
(£)
MRP (3x4)
Wages per
Contribution (£)
(calc 5-6) 10 15
150 30
120 24 14
196
166 36 12
144
114 44 8 11 88 58 50 60 53 9 27 -3
MPP = number of extra units firm gets from hiring next person
MRP = the extra revenue the next person hired give a firm
Contribution = the extra revenue the next person gives a firm – the cost of paying the extra person
Complete the table.
Market conditions change. Wages can now be paid at £30 as you have moved to Indonesia
How does this change the model? What can this tell us about how firms react to market condition changing? How does this margin analysis directly affect unemployment in countries?
However, what does this model NOT tell us though about the two countries?

12. Elasticity of Demand for Labour
The elasticity can change based on:
Time
How close the substitutes
PeD of the product e.g PeD good = inelastic demand for labour
% of labour costs to total costs

13. So then: we now know that…..

14. Supply of labour – you! Supply of Labour curve
A SL curve shows what time/hours a worker is willing to commit to at a given wage rate
The supply curve is backwards sloping at high levels of income
Workers have to substitute work for leisure or vice versa
Work is often referenced as an inferior good
Income effect – the more you get paid the less you want to work and demand more leisure time
Positive Substitution effect – the more you get paid the more hours you work
Negative substitution effect – the more you get paid the more leisure time you demand
So, welfare is maximised where:
Welfare from last £ earned = W from last unit of leisure sacrificed
However, working is not all about money but job satisfaction, location, friends and family and commuting all play a role in deciding to offer labour in a market
Y & Subs effect on supply of labour

15. Supply of labour: Perf mkt vs Monopsonist
Supply of labour in PM or imperfect market
In the perfect market firms are wage- takers (the prevailing the market rate)
In the PM a firm is confronted with a perfectly elastic SL curve
However, in most markets (which are oligopoly or imperfect) the SL curve is upward sloping
The cost of employing an extra worker will cost the firm more to entice them to work for them. BUT ALSO if it pays the new worker more money it also has to pay it’s other workers the NEW wage rate
This means the MC of Labour for imperfect firms is much higher than the supply of labour curve and is separated out
This is true for a monopsonist employer (a firm that hires most of the workers in an industry)
Monopsonist firms are often Public Sector /Government institutions
Supply of labour and MC of Labour in imperfect/ monopsonist markets

16. Factors affecting supply of labour and it’s elasticity
The responsiveness of quantity supplied of labour given a change in price(wage rates)
Changes in elasticity will occur when:
Availability of suitable labour in other industries and their ‘poachability’ e.g. unskilled/poachable (elastic) vs specialised skillset (inelastic)
Time – inelastic short-run as difficult to find lots of new employees (esp in labour markets that require deep skillset). Elastic long run as you can take time to find and train new employees
Level of unemployment – high levels = elastic supply / low levels = inelastic supply

17. Supply of labour in whole economy does change……factors such as:
Choosing not to work yet……education, home-making, unemployed or early retirement = lost potential in output/production
Retired workers are still mobile and often have deep knowledge and skills….incentives needed?
Immigration into the UK economy - economic migration not refugees
Creating incentives for workers by cutting taxation and lowering benefits
Boosting skills by educating workers to higher levels
Changing social trends – women workers/careers
Power and influence of trade unions upon markets……southern rail and tube strikes
Occupational and Geographical mobility of labour

18. Week commencing 27th Feb: Consolidation work – Demand and Supply of Labour & homework
Complete the anonymous pupil feedback questionnaire (10mins)
In your team, work through the questions 1-28 (DO NOT do questions )
Work together and work through the questions on the A3 paper
You can disagree with your team-mates on your own sheet
Answers available on Showbie ‘class discussion section’ for self-marking
Review and absorb the ‘Labour Market Investigation 2017’ worksheet
If time allows, start to conduct some early searches/research from the ONS
Work outside of lesson (AKA homework) – start the Labour Market investigation 2017 work this week
Extension consolidation work using the Economics textbook Unit 58 Supply of Labour - Answer questions 1 & 2 and Unit 59 questions 1, 2 & 4

19. Labour market investigation 2017
Aim:
Conduct an independent study of the UK labour market
Capture and report on your findings
Next three homework's
Follow the links and steps carefully
Worksheet on Showbie – posted Monday 27th March
Submitted for week-ending 10th March

20. Verbal discussions…..
To what extent will a perfect market economy lead to equality of wages:
within a market
between different types of labour markets
Why would a firm decide to offer wages above the market clearing price?
How much can MRP explain inequality of incomes for UK workers?
Would a higher national average wage for men provide evidence of sexual discrimination in the labour market?