Cambridge A Level Economics: Labour demand, supply and wages in perfect markets (9708) – Revision Notes

These notes condense sections 8.3.1 to 8.3.7 of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028: labour demand, MRP theory, labour supply and the equilibrium wage in a perfect market. Topic 8 is A Level content, and AS Level content is assumed knowledge. For full explanations, read the study guide, then test yourself with the practice set. Find weak spots with the free diagnostics. Course home: Cambridge A Level Economics. Progress tracker: checklist. All figures are invented.

Key definitions

Term	Meaning
Derived demand	Demand for a factor (here labour) that arises from demand for the goods or services it helps produce
Marginal physical product (MPP)	Extra output from one more worker
Marginal revenue product (MRP)	Extra revenue from employing one more worker
Labour demand curve (firm)	The MRP curve: the wage on the vertical axis, workers on the horizontal axis
Labour supply curve	Workers willing and able to work at each wage
Perfect labour market	Wage-taking employers and workers, identical labour within an occupation, full information, free movement
Equilibrium wage	The wage at which quantity of labour demanded equals quantity supplied

8.3.1 to 8.3.3 Demand for labour

Chain of reasoning. Higher consumer demand for a product raises expected sales, so output targets rise, so the firm wants more workers. Lower demand reverses each link.

Movement or shift?

Event	Result on the demand curve
Wage rate rises	Contraction, a movement up the curve
Wage rate falls	Extension, a movement down the curve
Product demand or price rises	Shift right
Productivity rises	Shift right
Capital becomes cheaper and replaces workers	Shift left
Labour becomes cheaper relative to a substitute factor	Shift right
Cost of employing each worker rises for a reason other than the wage	Shift left

Factors in an occupation. The demand curve for an occupation reflects the combined hiring decisions of every firm that employs that type of worker, so the same factors apply to both. A higher wage always moves you along the curve, never across it.

8.3.4 MRP theory

Formulas

Situation	MRP
Any firm	MPP × MR
Firm selling at a constant price	MPP × price
From a revenue table	Change in total revenue ÷ change in workers

Method in steps: building a firm’s labour demand

1. Find total output at each level of employment.
2. Subtract successive totals to get MPP.
3. Multiply by MR (price if the price is fixed), or take the change in total revenue.
4. For a given wage, count the workers whose MRP is at or above the wage.
5. Plot wage against workers: this is the demand curve.

Why it slopes down. Diminishing marginal returns cut MPP as more workers share fixed capital. If the firm must lower its price to sell extra output, MR falls too.

Hiring rule. Wage-taking firm: hire until MRP = wage. If MRP is above the wage, the worker adds more to revenue than to cost. If MRP is below, the worker costs more than they add.

Small worked reminder. A kiln operator’s MPP is 15 loads and each load sells at a fixed 6. MRP = 15 × 6 = 90. At a wage of 80 the worker is worth hiring. At 95 they are not.

8.3.5 and 8.3.6 Supply of labour

Type	Examples	Effect on the curve
Wage factor	Wage rate for this job compared with other jobs	Movement along: extension if higher, contraction if lower
Non-wage: job features	Hours, safety, location, satisfaction, benefits, job security	Better features shift right
Non-wage: entry costs	Length and cost of training, qualifications	Higher costs shift left
Non-wage: alternatives	Pay and conditions elsewhere	Better alternatives shift left
Non-wage: the pool of workers	Population, age structure, migration, retirement age	Larger pool shifts right
Non-wage: mobility and incentives	Ease of moving jobs or regions, state benefits	Easier movement shifts right. Generous benefits can shift left

8.3.7 Equilibrium

Method in steps: wage and employment

1. Write demand and supply for the same units.
2. Set QD = QS and solve for W.
3. Substitute W back into both equations to get Q. They must agree.
4. For disequilibrium, substitute a given wage into both. The gap is excess supply (above equilibrium) or excess demand (below).

Comparative statics

Shift	Wage	Employment
Demand right	Up	Up
Demand left	Down	Down
Supply right	Down	Up
Supply left	Up	Down
Demand right and supply right	Uncertain unless sizes known	Up

Draw it in words: put W on the vertical axis and employment on the horizontal axis, label the curves D and S, mark equilibrium where they cross and drop lines to both axes. After a shift, label the new curve and the new equilibrium and compare.

Worked reminders

Deriving a demand schedule. A tile maker sells at a fixed price of 5. Total output with 1, 2, 3 and 4 workers is 30, 54, 72 and 84.

Workers	Output	MPP	MRP (MPP × 5)
1	30	30	150
2	54	24	120
3	72	18	90
4	84	12	60

At a wage of 100, the second worker’s MRP of 120 exceeds the wage but the third worker’s 90 does not, so the firm hires 2. At a wage of 70 it hires 3. The pairs (150, 1), (120, 2), (90, 3) and (60, 4) trace the demand curve.

Two curves shifting at once. Start from QD = 200 − 5W and QS = −40 + 7W, which gives W = 20 and Q = 100. Now demand shifts to QD = 224 − 5W and supply shifts to QS = −4 + 7W. Setting them equal: 224 − 5W = −4 + 7W, so 228 = 12W, W = 19 and Q = 129 (check: 224 − 95 = 129 and −4 + 133 = 129). Employment rises 29%, but the wage falls 5%, because the supply shift was larger than the demand shift in its effect on the wage. If you are only told the directions, say the wage change is uncertain and explain why.

Must-know distinctions

• MPP versus MRP. MPP counts units of output. MRP counts money.
• MR versus price. They are equal only if the firm can sell more without lowering the price.
• Movement versus shift. Wage changes cause movements. Everything else shifts.
• Wage factor versus non-wage factor in labour supply.
• Firm versus industry demand. The industry curve adds firms together but reacts to product price changes.

Evaluation prompts

• Can the output of one worker be measured? Teams and public services make MRP hard to calculate.
• Do real workers have full information and free movement? If not, the model is a benchmark.
• Short run against long run: supply is less elastic while people retrain or relocate.
• How big is the shift? The direction of a combined shift may be certain, but the size may not.

Quick self-test

1. Why is labour demand a derived demand?
2. With a fixed price of 6, total output rises from 120 to 135 units when a worker is added. What is the MRP?
3. Total revenue rises from 2,400 to 2,750 when one more worker is hired. The wage is 320. Should the firm hire?
4. A rival occupation raises its pay. What happens to supply of labour in this occupation?
5. A worker adds 20 units of output and the firm’s marginal revenue is 4 per unit. Calculate the MRP and say whether the firm hires at a wage of 70.
6. Demand: QD = 200 − 5W. Supply: QS = −40 + 7W. Find the equilibrium wage and employment.
7. At a wage of 24, how large is the excess in this market?
8. Demand shifts to QD = 224 − 5W. Find the new wage and employment.
9. State two non-wage factors that shift labour supply.
10. A firm’s product price rises 30%. Does the wage cause the change in employment?

Answers

1. It comes from demand for the goods the workers help produce.
2. MPP = 15, MRP = 15 × 6 = 90.
3. MRP = 2,750 − 2,400 = 350, which exceeds the wage of 320, so yes.
4. Supply shifts left as workers move to the rival occupation.
5. MRP = MPP × MR = 20 × 4 = 80. This exceeds the wage of 70, so yes, the firm hires.
6. 200 − 5W = −40 + 7W, so 240 = 12W, W = 20 and Q = 100.
7. QD = 80, QS = 128, so excess supply of 48.
8. 224 − 5W = −40 + 7W, so 264 = 12W, W = 22 and Q = 114.
9. For example: working conditions and the length of training required.
10. No. Higher MRP shifts the demand curve right. The wage is unchanged, so this is a shift, not a movement.

Where marks are usually lost

• Labelling the vertical axis “price” instead of “wage rate”, or leaving axes unnamed.
• Shifting a curve when the wage alone has changed.
• Using price for MR when the firm must cut its price to sell more.
• Stopping the hiring rule at the wrong place, for example where MRP is zero.
• Listing supply factors without saying which way the curve moves.
• Assuming equilibrium employment always rises. Check which curve shifted.
• Listing evaluation points with no judgement about which matters most.

Official syllabus

Source: Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment, sections 8.3.1 to 8.3.7.