The Demand for Labour

The Demand for Labour

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Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes

Demand for Labour

Labour is a derived demand – labour is a derived demand which means the quantity of labour firms hire is obtained from the demand for the product produced

Demand for labour – the price firms are willing to pay to hire a specific number of workers at a given wage rate and is determined by the marginal revenue product

For e.g if the demand of visits to restaurants rise, the demand for waiters/waitresses will also increases as more workers are now needed

Factors Influencing the Demand for Labour

  • Worker productivity – if the productivity of a worker increases, they appear more ‘attractive’ to an employer, encouraging them to be hired. Employers are more likely to invest workers they know will produce high quality work
  • Marginal Revenue Product = marginal physical product x marginal revenue of a good. This refers to the level of consumer demand for the product being made and is a key determinant of wages. A higher MRP will increase the demand for labour
  • Wage rate – the marginal cost of labour
  • Technology – technological advancements mean that work can be done through the process off automation and with the use of machines instead of labour, resulting in a loss of jobs
  • Demand for the products produced – firms will higher more workers if the demand for the products are high as more people are needed to produce them

The determinants of the elasticity of demand for labour

  • Inelastic labour demand – this usually occurs if there are few substitutes available; strikes will result in the wage rate increasing but not a drastic change in the employment level
  • A lower supply of labour will lead to a higher increase in wage rate where there is an inelastic demand for labour, instead of an elastic demand for labour
  • Shifts in the demand and supply curve will affect the wage rate and level of employment

The Elasticity of Demand is affected by:

  • The proportion of labour costs to total costs – an elastic demand for labour will have a higher ratio of labour costs to total costs
  • The easier it is to substitute factors – an elastic demand for labour means firms can easily switch to cheaper forms of production
  • PED of the product – the demand for labour will more price elastic if the product is also price elastic

AQA Spec – Additional Content

The marginal productivity theory of the demand for labour

  • This theory is based on the assumption that the demand for labour is dependent on the marginal revenue product
  • marginal revenue product = marginal product x marginal revenue
  • Marginal product of labour refers to the additional output which can be produced from each unit of labour
  • Marginal revenue of labour refers to the additional revenue gained for each extra unit of labour
  • Equilibrium in the labour market occurs when the marginal cost = marginal revenue
  • MRP is denoted by the demand curve – this shows the relationship between the wage rate and number of workers employed


Quick Fire Questions – Knowledge Check

1. Define ‘Demand for Labour’ (2 marks)

2. Explain why the demand for labour is a derived demand (2 marks)

3. Identify and explain five factors influencing the demand for labour (10 marks)

4. Define ‘Marginal Revenue Product’ (2 marks)

5. Explain the relationship between Marginal Revenue Product and Demand for Labour (4 marks) 

6. Identify and explain three determinants of the elasticity of the demand for labour (6 marks)


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