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Labour Market

Labour Market. MRP Theory. Starter. Explain what derived demand is. Give 3 determinants of labour demand and explain each. Economic labour market articles. Aims and Objectives. Aims: Analyse and Evaluate MRP theory. Objectives: Define MP, MR, and MRP.

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Labour Market

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  1. Labour Market MRP Theory

  2. Starter • Explain what derived demand is. • Give 3 determinants of labour demand and explain each. • Economic labour market articles

  3. Aims and Objectives Aims: • Analyse and Evaluate MRP theory. Objectives: • Define MP, MR, and MRP. • Describe the relationship between MRP and Diminishing marginal returns. • Explain the MRP curve. • Analyse shifts in the demand curve for labour. • Evaluate MRP theory.

  4. Marginal Productivity Theory The demand for labour depends on it’s marginal revenue product. MRP: the value of the physical addition to output arising from hiring one extra worker or F of P. Where the marginal cost of hiring another worker equals its MRP, the equilibrium qty of labour is established.

  5. MRP MRP = MP X MR MP = Marginal Product is the number of extra units of output a firm gains from one extra unit of labour. MR = Marginal Revenue is the amount of extra revenue generated from one extra unit of labour.

  6. Diminishing Marginal Returns Complete the table Comment on any relationships you notice Draw a graph plotting number of workers and MRP. Comment on any relationships you notice Plot profit on the same graph and comment.

  7. Diminishing Marginal Returns

  8. Diminishing Marginal Returns • After the employment of the second worker and up to the employment of the ninth worker, each one adds more to revenue than to cost. • After the employment of the ninth worker the situation is reversed and each additional employee adds more to costs than to revenue. • Why does it decrease? • Profit maximised at 9 people.

  9. Marginal Revenue Product Curve Wage Rate/ Marginal Revenue Product Wage rate (MC2) W2 Wage rate (MC1) W1 MRP Quantity of Labour Q1 Q2

  10. Marginal Revenue Product Curve • Demand curve for labour • A firm will demand labour at the point where the MRP = MC (Wage Rate) • Wage = W1 firm demands Q1 • If wage rate rises to W2 demand for labour falls to Q2. • MRP rises at first until D.Returns sets in. • Firm will not be maximising profit at lower employment level, as if it increases employment it can generate MRP over and above the cost of employing them.

  11. Peer Teaching • Prepare to teach the rest of the class in pairs the marginal revenue product curve. • You must define MRP. • Explain what factors may lead to an increase in wage rates from W1 to W2. • Draw the diagram.

  12. Shifts in the Demand Curve for Labour • How would increases or decreases in workers productivity at the Toyota Car Assembly factory in Derbyshire affect Toyota’s demand for labour?

  13. Shifts in Demand Curve for Labour Wage Rate/ Marginal Revenue Product To avoid ambiguity demand curves are now straight. MRP = D2 MRP = D1 Quantity of Labour

  14. Shifting the Labour Demand Curve • Shift to the right if the MRP of labour increases. (i.e. if marginal product of labour/or marginal revenue increases). • Eg. The demand for car assembly workers will increase if the productivity of car assembly workers rises. (increased training/price of output rises due to increase in car demand).

  15. Critique of MRP Theory • Brainstorm in pairs/groups any criticisms you have of this theory.

  16. Critique of MRP Theory • Measuring MRP is difficult. • Work is often carried out in teams which makes it hard to identify to contribution to output of individual workers. • Difficult to measure MP of workers in the tertiary sector……how do you measure output of accountants?

  17. Plenary • Define Marginal Product • Define Marginal Revenue Product • Draw a marginal revenue product curve. • Provide a criticism of this theory.

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