What happens to the demand for labour when the price of capital equipment falls?

Where capital and labour are substitutes, firms replace workers with machines, so the demand curve for labour shifts to the left.

Define the marginal revenue product of labour.

The marginal revenue product of labour is the extra revenue a firm gains from employing one more worker, equal to that worker's marginal physical product multiplied by the marginal revenue from the output.

How many workers does a profit-maximising firm employ?

It employs workers up to the point where the marginal revenue product of labour equals the wage rate.

An extra worker adds 40 units a week to output and each unit sells for £6. Should the firm hire at a weekly wage of £220?

The marginal revenue product is 40 × £6 = £240 a week, which exceeds the £220 wage, so hiring adds £20 a week to profit and the firm should hire.

Edexcel A-Level Economics B 9EB0

Scarcity, Choice and Potential Conflicts

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Global Labour Markets

The demand for and supply of labour

3 things to know
Papers 2 and 3

Overview

Labour as a derived demand and its determinants, the price of capital, the marginal revenue product of labour and the hiring decision, the supply of labour to an occupation and its elasticity, net advantages, wage differentials, equilibrium wages after shifts in demand and migration, monopsony employers, slow-clearing labour markets, and regional pay.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

Why do labour markets rarely clear instantly?

Key term

Why is the demand for labour described as a derived demand?

Key term

State three determinants of a firm's demand for labour.

Questions from this subtopic

Each one with the model answer underneath.

1
Why is the demand for labour described as a derived demand?
Model answer
Labour is wanted not for its own sake but for the output it produces, so the demand for labour depends on the demand for the firm's product.
2
State three determinants of a firm's demand for labour.
Model answer
The demand for and price of its output, the productivity of its workers, and the wage rate relative to the cost of capital equipment.
3
What happens to the demand for labour when the price of capital equipment falls?
Model answer
Where capital and labour are substitutes, firms replace workers with machines, so the demand curve for labour shifts to the left.
4
Define the marginal revenue product of labour.
Model answer
The marginal revenue product of labour is the extra revenue a firm gains from employing one more worker, equal to that worker's marginal physical product multiplied by the marginal revenue from the output.
5
How many workers does a profit-maximising firm employ?
Model answer
It employs workers up to the point where the marginal revenue product of labour equals the wage rate.
6
An extra worker adds 40 units a week to output and each unit sells for £6. Should the firm hire at a weekly wage of £220?
Model answer
The marginal revenue product is 40 × £6 = £240 a week, which exceeds the £220 wage, so hiring adds £20 a week to profit and the firm should hire.

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Scarcity, Choice and Potential Conflicts

Enterprise, Business and the Economy

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The Role of Credit in the Economy

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ABorrowing becomes dearer and saving more rewarding.

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