1. The Labour Market: Demand and Supply
A2 Economics
Unit 3

2. To understand the demand for labour and marginal productivity theory.
Aims and Objectives
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.

3. Agriculture Industry Services Medieval-Industrial Revolution
Industrial Revolution - Thatcher
Services
Thatcher-Present

4. Weekly Real Earnings, UK (Full Time Males, 2005 £)
1993
2005
Whole Economy
378
519
Financial Services
452
664
Construction
367
470
Energy and Water
495
646
Percentage increases: 27
31.9
21.9
23.3
Provide two points of analysis from the above statistics.

5. In the Context of the Business Cycle
Why might wage rates have increased more in financial services or energy than in construction?

6. Demand and Supply for Labour in the Economy

7. Derived Demand
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.

8. Aggregate Demand for Labour
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.

9. Aggregate Demand For Labour
Describe what factors may have lead to changes in the employment and unemployment rates over the time period

10. 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

11. 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.

12. 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.

13. MRP
MRP = MP X MR
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.

14. 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.

15. Marginal Product (Total Product x - Total Product y) Marginal Revenue
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 5 60
100
-40 2 26 14 70
130
200
-70 3 50 24
120
250
300
-50 4 90 40
450
400
140
700
500 6
1000
600 7
254 54
270
1270
570 8
304
1520
800
720 9
340 36
180
1700
900 10
358 18
1790
790 11
374 16 80
1870
1100
770
378 20
1890
1200
690

16. Diminishing Marginal Returns

17. 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.

18. Multiple Choice Questions

19. Homework