Introduction

After you have worked through this section of the learning unit, you should be able to:

  • graphically represent the market demand for labour

In the previous sections, we look at the demand for labour from the perspective of an individual producer. What we are however interested in is the market demand for labour. Assuming that we are operating in a perfectly competitive labour market and we know that there are many producers in this market that produce the same product. To obtain the labour market demand schedule, we add all the individual labour demand schedules. This labour market demand schedule has the same properties as the individual labour demand schedules and it indicates that a negative relationship exists between the wage rate and the quantity of labour demanded. This labour market demand is represented graphically in the following diagram:

Activity

Indicate whether the following statements relating to the demand for labour is true or false:

a. The marginal cost of labour is the cost associated with employing an additional unit of labour and is equal to the price of the product

Incorrect. The statement is false. The marginal cost of labour is the cost associated with employing an additional unit of labour and is equal to the wage.

Correct. The statement is indeed false. The marginal cost of labour is the cost associated with employing an additional unit of labour and is equal to the wage.

b. The marginal revenue product (MRP) curve represents the demand curve for labour.

Correct. The statement is indeed true. The marginal revenue product (MRP) curve represents the demand curve for labour.

Incorrect. The statement is true. The marginal revenue product (MRP) curve represents the demand curve for labour.

c. A firm will continue to hire labour until MRP is equal to the wage rate.

Correct.  The statement is indeed true. As long as the contribution of an additional unit of labour exceeds the cost of employing the additional unit, it is profitable for the firm to employ the additional unit of labour.

Incorrect.  The statement is true. As long as the contribution of an additional unit of labour exceeds the cost of employing the additional unit, it is profitable for the firm to employ the additional unit of labour.

d. If the MRP is greater than the wage rate, it will be profitable for a firm to employ additional labour.

Correct.  The statement is indeed true. As long as the marginal revenue product of an additional unit of labour exceeds the wage, it is profitable for the firm to employ the additional unit of labour since the additional unit contribute more to revenue that what it costs to employ the unit.

Incorrect.  The statement is true. As long as the marginal revenue product of an additional unit of labour exceeds the wage, it is profitable for the firm to employ the additional unit of labour since the additional unit contribute more to revenue that what it costs to employ the unit.

e. Between the wage and the units of labour employed, a positive relationship exists.

Incorrect.  The statement is false. A negative relationship exists.

Correct.  The statement is indeed false. A negative relationship exists.

Use the data in the following table to:

Units of labour Total product (pairs of shoes)
(TP)		 Marginal product (pairs of shoes)
(MPP)		 Price per pair of shoes

(R)

 Marginal revenue product
(MRP)
0 0 --- 70 ---
1 12 12 70 840
2 22 10 70 700
3 31 9 70 630
4 36 5 70 350
5 40 4 70 280
6 42 2 70 140

a. Draw the demand for labour curve.
b. Indicate how many units of labour will be employed at a wage rate of R280.
c. Indicate how many units of labour will be employed at a wage rate of R700.
d. What happens with the unit of labour employed if the wage increases?

Click to Show Answer

a. b. and c.

d. As the wage increases, the quantity of labour demanded decreases.