Question

Labour As A Resource Market

Questions

1. Explain the difference between direct demand and derived demand.

2. Why would a firm seek to equate its marginal revenue product of labour (MRPL) with the market wage rate?

3. Explain what the term productivity means and why an improvement in productivity shifts the demand curve for labour.

4. What is the opportunity cost of someone offering his or her labour skills in the workplace?

5. Summarize the factors that can influence the labour supply curve.

Answer 1

1. The difference between derived demand and direct demand is that in direct demand, the individuals will get direct utility from the consumption of such goods. For example, demand for TV. On the other hand, in case of derived demand, demand results from the need to provide final goods and services to the consumers.For example, demand for labor.

2. Firms equate marginal revenue product of labor with the market wage rate. Marginal revenue product of labor is the change in revenue that results from employing an additional unit of labor.

Now, a profit maximizing firm will pay its workers equal to the marginal revenue product because if they pay more or less than the MRPL, it would not be efficient for the firm. Paying more would imply that the firm is paying more than its revenue. Paying less would imply that the firm is not operating on the efficient level.

3. Productivity implies the efficiency of production. It can also be interpreted as the ratio of what is produced to how much is required to produce it. Productivity of labor implies the amount of commodity produced per unit of labor.

Increase in productivity means more of goods per unit. This raises the marginal revenues of firms. Thus, firms can get more revenue with the same amount of labor. This raises the equilibrium wage rate. Due to this, demand for labor curve will shift forward implying more wage at the same amount of employment.

4. The opportunity cost of offering labor skills in the market can be the time the person could invest in education, leisure of individuals, self employment etc.

5. The labor supply curve can be influenced by many factors such as:

i. The wage rate: More wages will mean people will supply more labor.

ii. Preference of individuals: If they prefer more leisure, they will supply less labor even at higher wage rates as is shown by the backward bending supply curve.

iii. Demographic changes: More people in the working age group means more supply of labor.

iv. Immigration: Influx of labor from other regions or countries can lead to increase in supply of labor.