Introduction into Factor markets - the Labour market

1. Labour Markets
by Komilla Chadha
April 2012
Wednesday, 11 April 12

2. Overview
Labour Supply
Labour demand and the Monopsony model
Optimising hiring
Minimum Wage
Note the elasticity of demand for labour is the sensitivity of
demand for labour for changes in output and demand for the
goods and service it creates.
Wednesday, 11 April 12

3. Labour Supply
The supply curve for labour
is defined as the average
factor cost curve.
It is better to increase a
worker’s wage as you can
see through a percentage
then lumpsum as this
translates into a shift of the
budget constraint.
Wednesday, 11 April 12

4. Labour Supply - a few key concepts
The total factor cost of labour can be defined as; average
factor cost X employment level.
Marginal factor cost of labour is the cost of having one
additional unit of labour. It is important to note that
this ,graphically, is twice as steep the average factor cost
curve.
Wednesday, 11 April 12

5. Labour demand
Labour demand is derived as it is the result of the demand for a good or
service that is created by labour inputs.
The SR demand is more inelastic as firms find themselves unable to run
without labour but in the long run this is not so much they case especially
with technological advanced.
Wednesday, 11 April 12

6. Labour demand: Monopoly
Monopsony is a market structure where there is only one buyer e.g. the NHS
is the only public sector healthcare organisation that recruits doctors.
I have a video on this please see: http://a2withkomilla.blogspot.co.uk/
2010/12/monopsony.html
The fundamental outcome of such a market is that wages are much lower
than normal and it depicts the need for a minimum wage to protect workers.
The optimal point of function is where MFC = demand because if
MFC>demand then this shows they are incurring costs and should lay off
some workers. If demand is > MFC then this implies there is still productivity
to be increased and money to be made and they should hire more workers.
Wednesday, 11 April 12

7. Optimising hiring
Marginal revenue of product is the amount of extra revenue received for an
additional product, and this must be equal to wage for this to be an optimal
rate as if revenue > wage, then there is scope to expand and is revenue<
wage then a loss is being made.
More important though is the value of marginal product which is the value an
additional unit of input would bring at current market price. It is calculated by
marginal product of labour X price, it is a better calculation as it includes
current market price. In order to optimise hiring this should be equal to wage
for the same reason as why marginal revenue of product should be.
Wednesday, 11 April 12

8. Minimum wage
The notion of minimum wage was designed to stop firms
from exploiting workers especially in cases of monopsony, so
that workers and their incomes are protected. However, what
is ironic is that minimum wage increases costs to firms thus
results in unemployment as firms can’t hire as many
workers.
Furthermore, it is largely influenced by the elasticity of
demand for labour. If labour is elastic i.e. >1 incomes fall
and <1 then they rise as firms are less likely to lay off
workers.
Wednesday, 11 April 12

9. Thank you for
watching
Please see my blog: http://
musingswithkomilla.blogspot.c
o.uk/
Wednesday, 11 April 12