3.5.1 Demand for labor
***Demand (firms) // Supply (employees)***
a) Factors that influence the demand for labor
Wage rate
Substitutes of labor
Demand for the product
Wage rate (D=MRP(M physical product x productivity))
MRP: The marginal revenue created for an addition of one unit of resource
Firms will hire the worker only if costs > revenue
Productivity of labor (education and skills)
Higher productivity = lower unit cost = can increase demand for labor
increase competitiveness of the firm
However, if wages rise but productivity also rise = no effect
Substitutes of labor (e.g. capital, machineries)
Demand for the product
Becoz derived demand
b) Demand for labor as a derived demand
Labor is a derived demand
Def: The demand for labor comes from the demand for what it produces
c) PED of labor: (firms)
= % change in Qd of L / % change in W
Elastic (Q>P) small wage change Inelastic (P>Q) small wage change
can cause large quantity of labor can lead to a more than proportional
DEMANDED change change in Qd of labor
Factors affecting PED of labor:
1) Time (coz LR replace workers wif machines) (capital/labor intensive)
Inelastic in SR, elastic in LR
2) Substitutes of labor e.g. machines
, Easily substitute = elastic
3) Proportion of wages in the firms’ TC
Small proportion of wage in a firms’ TC = inelastic in D of L
High proportion = elastic D of L
4) PED of the product it produces
Elastic PED of a product (Q>P) wages cannot pass onto the good by increase
costs becoz will drive them away = more elastic PED of labor
***Demand (firms) // Supply (employees)***
a) Factors that influence the demand for labor
Wage rate
Substitutes of labor
Demand for the product
Wage rate (D=MRP(M physical product x productivity))
MRP: The marginal revenue created for an addition of one unit of resource
Firms will hire the worker only if costs > revenue
Productivity of labor (education and skills)
Higher productivity = lower unit cost = can increase demand for labor
increase competitiveness of the firm
However, if wages rise but productivity also rise = no effect
Substitutes of labor (e.g. capital, machineries)
Demand for the product
Becoz derived demand
b) Demand for labor as a derived demand
Labor is a derived demand
Def: The demand for labor comes from the demand for what it produces
c) PED of labor: (firms)
= % change in Qd of L / % change in W
Elastic (Q>P) small wage change Inelastic (P>Q) small wage change
can cause large quantity of labor can lead to a more than proportional
DEMANDED change change in Qd of labor
Factors affecting PED of labor:
1) Time (coz LR replace workers wif machines) (capital/labor intensive)
Inelastic in SR, elastic in LR
2) Substitutes of labor e.g. machines
, Easily substitute = elastic
3) Proportion of wages in the firms’ TC
Small proportion of wage in a firms’ TC = inelastic in D of L
High proportion = elastic D of L
4) PED of the product it produces
Elastic PED of a product (Q>P) wages cannot pass onto the good by increase
costs becoz will drive them away = more elastic PED of labor
