 # Labour Market: Elasticity of Demand

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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. Analyse the supply of labour in the UK. Evaluate how governments can influence the demand or supply of labour.

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

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

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. Labour Demand A B C D

Determinants of Labour Demand
Availability of Substitutes Time Period The Proportion of Labour Cost to Total Cost Elasticity of Demand for Product

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. E.g. Self Service Machines or Car Manufacturing.

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.

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.

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.

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

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

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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