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Labour Market: Elasticity of Demand

Labour Market: Elasticity of Demand. A2 Economics. Aims and Objectives. Aim: To understand labour market demand elasticity and its determinants Objectives: Define elasticity in the labour market. Explain the factors affecting the elasticity of demand.

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Labour Market: Elasticity of Demand

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  1. Labour Market: Elasticity of Demand A2 Economics

  2. Aims and Objectives Aim: • To understand labour market demand elasticity and its determinants Objectives: • Define elasticity in the labour market. • Explain the factors affecting the elasticity of demand. • Analyse the supply of labour in the UK. • Evaluate how governments can influence the demand or supply of labour.

  3. Starter • Define elasticity of demand. • Write the equation to calculate elasticity of demand.

  4. Elasticity of Demand for Labour Definition: The responsiveness of quantity demanded of labour to a change in the wage rate. Equation: Elasticity of Demand for Labour = Percentage change in qty labour demanded Percentage change in wage rate

  5. Determinants of Labour Demand • In groups decide on the factors you feel determine the elasticity of demand for labour. Be prepared to justify your answer.

  6. Determinants of Labour Demand

  7. Availability of Substitutes • The easier it is to substitute other factors of production for labour, the more a rise in real wage rates will lead to firms replacing employees with machinery. • http://www.youtube.com/watch?v=7ppnWmSz-lU • E.g. Self Service Machines or Car Manufacturing.

  8. Time Period • Long Run: Easier to substitute labour for other factors of production • Short Run: firms may not have enough time to re-organise themselves, and so have to maintain their levels of employment • Contracts: workers have contracts which are expensive to terminate or change, deterring firms from making redundancies.

  9. Elasticity of Demand for Product • How would elasticity of demand differ between cigarettes and orange juice? • Labour is a derived demand. • Therefore if demand for a product collapses, then the demand for labour will fall too! • The elasticity of demand for labour in an industry mirrors that of the elasticity of demand for the product/s the industry produces.

  10. Proportion of Labour Cost to Total Cost • Higher the proportion of labour cost to total cost the greater the elasticity of demand for labour. • An increase in wages will have a large impact on total costs.

  11. Elastic Demand For Labour Wage Rate W2 W1 D=MRP Q2 Quantity of Labour Q1

  12. Inelastic Demand For Labour Wage Rate W2 W1 D=MRP Quantity of Labour Q2 Q1

  13. Plenary • Define elasticity of demand for labour. • Describe what factors influence the elasticity of demand for labour. • Draw an elastic labour demand curve and an inelastic labour demand curve. • What are the effects of mechanisation on the elasticity of demand for labour?

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