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

These notes condense 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. The AQA website numbers them 3.1.6.1 to 3.1.6.3 (the combined PDF prints 4.1.6.1 to 4.1.6.3). For full explanations go to the study guide, then test yourself with the practice questions. The AQA A-level Economics hub, the printable checklist and the free 10-minute diagnostics help you plan. Monopsony, trade unions, the National Minimum Wage and discrimination are separate units. All figures are invented for illustration.

Key definitions

Term	Meaning
Derived demand	Employers want labour only because of the goods and services it produces, so the need for workers follows product sales
Marginal physical product (MPP)	The additional units produced when one more worker is employed and other inputs stay the same
Marginal revenue product (MRP)	Money value of one more worker’s output: MPP × marginal revenue
Demand curve for labour	Shows the wage rate against the number of workers employed (the MRP curve)
Elasticity of demand for labour	Responsiveness of employment to the wage: percentage change in employment divided by percentage change in the wage
Supply curve for labour	Shows the wage rate against the number of workers willing to work in an occupation
Wage taker	A firm that must pay the market wage and cannot change it by hiring more or fewer workers
Relative wage	The wage in one occupation compared with another, for example T ÷ P

Method: how many workers to hire

1. Find MPP for each worker: change in total output.
2. Multiply by marginal revenue (the price, if the price is fixed) to get MRP.
3. Compare each MRP with the wage.
4. Hire while MRP is at least the wage. Stop before the first worker whose MRP is below it.

Reminder. A nursery (illustrative) sells plants at £5. Total output for 1 to 5 workers is 20, 36, 48, 56, 60.

Workers	MPP	MRP at £5	MRP at £7
1	20	£100	£140
2	16	£80	£112
3	12	£60	£84
4	8	£40	£56
5	4	£20	£28

At a wage of £50, hire 3 (the third adds £60, the fourth £40). If the plant price rises to £7, the fourth adds £56, so hire 4. A change in product price shifts the curve; a change in the wage moves you along it.

Demand for labour: shifts and elasticity

Shifts right: higher demand for the product, higher MPP (training, better equipment), a higher price of a substitute factor, more firms in the industry.

Shifts left: weaker product demand, lower productivity, cheaper machines that substitute for labour.

Elasticity formula and examples.

Elasticity = % change in employment ÷ % change in wage.

• Wage £10 to £11 (+10%), employment 1,000 to 940 (−6%): elasticity −0.6, inelastic. Wage bill £10,000 to £10,340, up 3.4%.
• Wage £20 to £22 (+10%), employment 400 to 300 (−25%): elasticity −2.5, elastic. Wage bill £8,000 to £6,600, down 17.5%.

Determinants (more elastic when):

• capital can easily replace labour;
• customers are sensitive to price;
• labour is a large share of total costs;
• the time period is longer.

Supply of labour

Type	Examples
Monetary	Wage, bonuses, overtime, pension, pay in alternative jobs
Non-monetary	Job satisfaction or dissatisfaction, working conditions, hours, risk, status, security, location

Shifts in market supply: change in the working-age population or migration, pay and conditions in other occupations, training requirements and licences, non-monetary changes, geographical and occupational mobility.

Not required: the determinants of an individual’s labour supply and the backward-bending supply curve. Do not spend time on them.

Competitive labour market model

Assumptions: many buyers and sellers, identical workers, full information, free movement.

Result: each firm is a wage taker and faces a horizontal supply of labour at the market wage. It hires where MRP = wage. The market wage is where market demand equals market supply.

Reminder. Country A, a market for hairdressers: QD = 1,500 − 30W and QS = 20W − 500. Then 2,000 = 50W, so W = £40 and Q = 300. At £44, QD = 180 and QS = 380, so there is a surplus of 200 and the wage falls. If demand rises by 100 at every wage (QD = 1,600 − 30W), the wage becomes £42 and employment 340.

Market forces and relative wages. Pay gaps between occupations reflect differences in supply (training, risk, unpleasant conditions) and in demand (product demand and productivity). A rise in demand for a scarce skill raises its wage. High pay then attracts entrants, supply shifts right and the gap narrows, but slowly if training is long.

Wage above equilibrium  -> surplus of workers -> wage falls
Wage below equilibrium  -> shortage of workers -> wage rises

Must-know distinctions

Pair	Difference
MPP and MRP	MPP is in units of output; MRP is in money, found by multiplying MPP by marginal revenue
Movement and shift (demand)	A wage change moves you along the curve; product demand, productivity or the price of capital shifts it
Movement and shift (supply)	A change in this occupation’s wage moves you along; pay elsewhere, training rules, migration or conditions shift it
Monetary and non-monetary	Pay and benefits against satisfaction, hours, risk and conditions
Firm and market	The firm takes the wage; the market sets it through demand and supply

Chains of reasoning to practise

Product demand falls. Fewer sales, so firms need less output, so MRP falls at each level of employment, so the labour demand curve shifts left, so at an unchanged wage fewer workers are wanted. In a competitive market the equilibrium wage and employment both fall.

Machines become cheaper. Capital is now a lower-cost way to produce, so the firm substitutes towards machines if technology allows. Labour demand shifts left. The effect is larger in the long run when the firm can replace its equipment.

A job becomes more dangerous. Fewer people are willing to work at each wage, so supply shifts left, the equilibrium wage rises and employment falls. The higher wage compensates for the risk.

Evaluation points

• Real markets are imperfectly competitive to a greater or lesser extent: workers differ, information is incomplete, mobility is limited.
• MPP is hard to measure in teams or in public services.
• Short-run demand is less elastic than long-run demand, because capital is fixed.
• Wages may adjust slowly, so shortages and surpluses can last.

Quick self-test

1. State the hiring rule for a profit-maximising firm in a competitive labour market.
2. The fourth worker raises total output from 52 to 60 units and each unit sells for £3. Calculate MPP and MRP.
3. A firm’s MRP for workers 1 to 5 is £50, £40, £32, £26 and £20. How many does it hire at a wage of £30?
4. A wage rise of 5% reduces employment by 8%. Calculate the elasticity and describe it.
5. A wage rises from £8.00 to £9.20 and employment falls from 600 to 570. Calculate the elasticity.
6. State two non-monetary influences on labour supply to an occupation.
7. Which way does supply shift if a new licence is required to work in an occupation?
8. A market has QD = 700 − 20W and QS = 30W − 300. Find the equilibrium wage and employment.
9. In question 8, what happens at a wage of £24?
10. In question 8, demand rises to QD = 750 − 20W. Find the new wage and employment.
11. Explain why a firm in this model is a wage taker.
12. Explain why a hard-to-enter occupation tends to pay more.

Answers

1. Hire while MRP is at least the wage.
2. MPP = 60 − 52 = 8 units; MRP = 8 × £3 = £24.
3. Three workers (£32 is above £30; £26 is below).
4. −8 ÷ 5 = −1.6; elastic.
5. Wage +15%, employment (570 − 600) ÷ 600 = −5%; elasticity −5 ÷ 15 = −0.33, inelastic.
6. For example job satisfaction and working conditions (also hours, risk, status).
7. Leftward: fewer workers are willing and able to supply at each wage.
8. 1,000 = 50W, so W = £20 and Q = 300.
9. QD = 220 and QS = 420, so there is a surplus of 200 workers and the wage falls.
10. 1,050 = 50W, so W = £21 and Q = 330.
11. There are many firms and workers, so one firm’s hiring cannot move the market wage.
12. Few people can supply the skill, so supply is small relative to demand and the equilibrium wage is higher.

Where marks are usually lost

• Redrawing the demand curve when only the wage has changed.
• Calculating MRP as MPP × wage instead of MPP × marginal revenue.
• Quoting a percentage change with no sign, or dividing by the final figure instead of the original.
• Stating the elasticity as a bare number without saying what it means.
• Listing non-monetary factors without linking them to the number of workers willing to supply.
• Describing a diagram without naming the axes, curves and equilibrium.
• Stating that the wage “rises” without saying whether employment rises or falls too.
• Writing about monopsony or unions when the question is about a competitive market.

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.