Demand for Labour (Edexcel A Level Economics A)

• If the selling price of the product increases, it increases the marginal revenue product of labour and the firm will demand more labour

• Higher priced products incentivise firms to supply more (law of supply) and demand for labour will continually increase with increasing prices

• As demand for labour is a derived demand, when an economy is booming then demand for most goods/services will be high - and the demand for labour will be high

• Conversely, when an economy is in a recession demand for most goods/services will be lower - and the demand for labour will be lower

The ability to substitute capital (machinery) for labour

The productivity of labour

• Firms will constantly evaluate if it will be possible and more cost effective to switch production from using labour to capital (machinery)

• If it is more cost effective, then demand for labour will fall

• If the productivity of labour increases (possibly through training) this will lower average costs and firms will likely demand more labour