AQA A-level Economics: Demand and supply of labour and competitive labour markets (7136) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover three parts of the AQA AS and A-level Economics specification (version 1.3, 29 June 2022) for the A-level, first taught from September 2015: the demand for labour and marginal productivity theory, influences upon the supply of labour, and wage determination in perfectly competitive labour markets (3.1.6.1 to 3.1.6.3 on the AQA website, printed as 4.1.6.1 to 4.1.6.3 in the combined PDF). All firms, places and figures are invented. Revise first with the study guide and the revision notes. See also the AQA A-level Economics hub, the printable checklist and the free diagnostics.

Questions

1. Explain what is meant by the derived demand for labour. [2]

2. A small laundry (illustrative) charges £6 for each wash load. Its total daily output with 1 to 5 workers is 18, 32, 42, 48 and 50 loads. The daily wage is £48.

(a) Calculate the marginal revenue product of the third worker. [2] (b) State how many workers the laundry employs and explain your answer. [3] (c) The price rises to £9 per load. Explain the effect on employment. [3]

3. A firm raises the hourly wage from £12.00 to £13.80. Employment falls from 500 to 425 workers.

(a) Calculate the elasticity of demand for labour. [3] (b) Calculate the percentage change in the wage bill. [2]

4. Explain two determinants of the elasticity of demand for labour. [4]

5. Explain the effect on the demand for labour in a factory of:

(a) a rise in demand for its product [2] (b) a fall in the price of machines that can do the same tasks as workers [2]

6. (a) Explain how working conditions can affect the supply of labour to an occupation. [3] (b) A new three-year training requirement is introduced for a trade. Explain its effect on the market supply of labour to that trade. [3]

7. In Region B (illustrative), the labour market for drivers has demand QD = 1,200 − 25W and supply QS = 35W − 360, where W is the hourly wage in £ and Q is the number of workers.

(a) Find the wage and the number of workers at which the market clears. [3] (b) At a wage of £30, find the size of any surplus or shortage and explain what happens next. [3] (c) Demand rises to QD = 1,260 − 25W. Calculate the new equilibrium. [2]

8. A firm sells its product at a fixed price of £4 per unit and pays the market wage of £12 an hour. Employing its tenth worker raises output by 4 units an hour and its eleventh by 2 units. Explain why the firm is a wage taker in a perfectly competitive labour market and decide how many of these workers it hires. [4]

9. Two occupations have the same demand, QD = 600 − 10W. In market R, which needs no formal training, supply is QS = 20W + 120. In market M, which needs a long qualification, supply is QS = 5W.

(a) Calculate the equilibrium wage in each and the ratio of M’s wage to R’s. [2] (b) Explain why the wage in M is higher. [3] (c) Demand for M rises by 90 at every wage. Calculate the new wage and employment in M. [2] (d) Explain one way market forces may then narrow the wage gap. [1]

10. Evaluate whether wages in the real world are determined only by demand and supply in competitive labour markets. [9]

Answers

1. Firms hire workers to produce goods and services, not for their own sake [1], so the demand for labour depends on (comes from) the demand for the product the workers help make [1]. [2] Examiner insight: Answers gain credit when they link labour to the final product. Saying only that labour is “in demand” does not show the derived link.

2. (a) MPP of the third worker = 42 − 32 = 10 loads [1]. MRP = 10 × £6 = £60 [1]. (b) MRP for workers 1 to 5 is £108, £84, £60, £36 and £12 [1]. The firm hires while MRP is at least the wage [1]. The third adds £60 (above £48), the fourth only £36, so it employs 3 workers [1]. (c) MRP at £9 is £162, £126, £90, £54 and £18 [1]. The fourth worker now adds £54, which is above £48 [1], so employment rises to 4; the fifth adds only £18 [1]. Examiner insight: Show the MRP of the last worker hired and the first worker rejected. A bare number of workers gives the examiner little to credit.

3. (a) Wage change = (13.80 − 12.00) ÷ 12.00 = +15% [1]. Employment change = (425 − 500) ÷ 500 = −15% [1]. Elasticity = −15 ÷ 15 = −1.0, unit elastic [1]. (b) Wage bill before = 12 × 500 = £6,000 and after = 13.80 × 425 = £5,865 [1]. Change = −135 ÷ 6,000 = −2.25% [1]. Examiner insight: Show both percentage changes, with signs, before dividing. Mixing up the order of the two percentages is a common slip.

4. Any two: substitutability of capital for labour, so if machines are a close substitute a wage rise cuts employment sharply and demand is more elastic [2]. Price sensitivity of customers: if a wage rise raises price and customers cut purchases, output and employment fall a lot, so demand for labour is more elastic [2]. (Also acceptable: labour’s share of total costs, or the time period, each with a developed reason.) [4] Examiner insight: Each determinant needs a reason that connects to the size of the employment response. A list of named factors gains little credit.

5. (a) Higher product demand raises MRP at each level of employment (derived demand) [1], so the labour demand curve shifts right [1]. (b) If machines are a substitute, cheaper machines make capital the lower-cost method [1], so labour demand shifts left [1]. Examiner insight: State the direction of the shift and the reason. Writing “more workers will be hired” without saying the curve shifts treats a shift as a movement.

6. (a) Working conditions are a non-monetary consideration [1]. Poor or unsafe conditions make the job less attractive, so fewer people are willing to work at a given wage [1]. Good conditions have the opposite effect, so pay can be lower for the same supply [1]. (b) The training requirement raises the cost and delay of entering [1], so fewer workers are able and willing to supply at each wage [1], shifting supply left, which raises the equilibrium wage and lowers employment [1]. Examiner insight: Link the factor to the number of workers willing to supply at each wage and say which way the curve moves. Do not drift into individual labour supply, which this specification does not require.

7. (a) 1,200 − 25W = 35W − 360 [1], so 1,560 = 60W and W = £26 [1], with Q = 1,200 − 650 = 550 [1]. (b) At £30, QD = 450 and QS = 690 [1], a surplus of 240 workers [1]. Job seekers compete for the limited jobs, bidding the wage down towards £26 [1]. (c) 1,260 − 25W = 35W − 360, so 1,620 = 60W and W = £27 [1], Q = 1,260 − 675 = 585 [1]. Examiner insight: Set demand equal to supply and show the algebra, then substitute back into both equations to check. Say which direction the wage moves, not only the new figure.

8. The firm is one of many employers and cannot affect the market wage, so it takes £12 as given [1]; the supply of labour to it is perfectly elastic at £12 [1]. MRP of the tenth worker = 4 × £4 = £16, above £12, so it is hired [1]. MRP of the eleventh = 2 × £4 = £8, below £12, so it is not hired: the firm employs 10 of these workers [1]. [4] Examiner insight: Convert physical product to money before comparing it with the wage. Comparing units of output with a wage in pounds is a common error.

9. (a) R: 600 − 10W = 20W + 120, so W = £16 [1]. M: 600 − 10W = 5W, so W = £40; ratio 40 ÷ 16 = 2.5 [1]. (b) Entry to M needs a long qualification, so few workers can supply it [1]; supply is small relative to demand at any wage [1], so the wage that clears the market is higher [1]. (c) 690 − 10W = 5W, so W = £46 [1], employment = 690 − 460 = 230 [1]. (d) The high wage attracts new entrants over time, shifting supply right and reducing the wage [1]. Examiner insight: Keep the supply and demand explanation tied to the figures. Explanations of wage gaps that ignore the supply side tend to be one-sided.

10. Knowledge: in the competitive model, the wage is set where demand (from MRP) meets supply, and shifts in either change relative wages [2]. Application or chain: for example, a rise in demand for a scarce skill raises its wage until entrants shift supply right [2]. Evaluation: real markets are imperfectly competitive to some degree [1]; workers are not identical and information is incomplete [1]; moving between jobs and regions is costly, so wages adjust slowly [1]; MPP is difficult to measure in teams and public services, so pay may not match productivity [1]. Judgement: the model is a useful benchmark for the direction of change, but the size and speed of adjustment depend on how competitive the market is [1]. [9] Examiner insight: Strong answers reach a reasoned judgement that says when market forces dominate and when they do not. A list of imperfections with no verdict leaves the evaluation unfinished.

Where marks are usually lost

• Redrawing the labour demand curve when only the wage has changed.
• Comparing units of output with a wage instead of converting to MRP.
• Leaving out the sign of a percentage change, or using the new figure as the base.
• Giving an elasticity value without saying whether demand is elastic or inelastic.
• Listing factors without a chain of reasoning to the number of workers.
• Quoting only the equilibrium wage and forgetting employment.
• Describing shortages and surpluses without saying how the wage then moves.
• Writing about individual labour supply, monopsony or unions when the question is about competitive markets.

Next steps

• Review the revision notes and the study guide.
• Tick off this topic on the printable checklist and see the AQA A-level Economics hub.
• Try all the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

AQA AS and A-level Economics (7135 and 7136), specification version 1.3, 29 June 2022, published by AQA. A-level content: the labour market sections on the demand for labour, influences upon the supply of labour, and perfectly competitive labour markets.