Pearson Edexcel International GCSE Economics: The labour market and government intervention in business (4EC1) – Revision Notes

These notes condense specification sections 1.2.5 (the labour market) and 1.2.6 (government intervention) of the Pearson Edexcel International GCSE Economics (4EC1) specification, Issue 3. The course is single tier. For full explanations read the study guide, then try the practice questions. Course pages: hub, checklist and free diagnostics. All figures are invented and illustrative.

Key terms

Term	Meaning
Derived demand	Demand for labour (or another input) that arises only because people want what it produces
Productivity	Output per worker (or per hour)
Human capital	Skills, knowledge and health of the workforce
Occupational mobility	Ease of moving to a different type of job
Geographical mobility	Ease of moving to a different place for work
Trade union	Organisation of workers that bargains together
Negative externality	A cost falling on outsiders that the producer does not pay
Pollution permit	A right, which can be sold on, to release a set amount of waste
Minimum wage	Legal lowest hourly pay
Merger / takeover	Two firms join / one firm buys another

1.2.5 a) Demand for labour

Factor	Change	Labour demand curve
Demand for final product	Up	Right
Demand for final product	Down	Left
Machines cheaper or better	Substitute for workers	Left
Machines dearer	Workers become relatively cheaper	Right
Productivity of workers	Up	Right

Chain: product demand falls, the firm makes less, it needs fewer workers, so labour demand shifts left.

Wage changes slide you along the curve; they never shift it.

1.2.5 b) Supply of labour

Factor	Supply shifts	Short reason
Population grows	Right	More people of working age
Immigration	Right	More workers available
Emigration	Left	Fewer workers
Ageing population	Left	Fewer of working age
Retirement age raised	Right	People work longer
School-leaving age raised	Left (short run)	Young people stay in school
Female participation rises	Right	More women in paid work
More skills and qualifications	Right (for skilled jobs)	More suitable applicants
Better mobility	Right (where jobs exist)	Workers can move to jobs

1.2.5 c), d) Quantity, quality and human capital

• Quantity of labour: number of workers or hours. Shortages leave orders unmet.
• Quality of labour: skill, health, motivation, which sets productivity.
• Education and training raise human capital, so output per worker rises, cost per unit falls and product quality improves.
• Costs to a firm: fees, lost output, risk of trained staff leaving.
• Benefits to the economy: higher productivity and incomes.

Worked reminder: labour cost per unit

Wage 12 an hour. Output per hour 20 before training, 26 after.

• Before: 12 ÷ 20 = 0.60 per unit.
• After: 12 ÷ 26 = 0.46 per unit.
• Fall ≈ 23%.

1.2.5 e) Labour market diagrams

Method in steps:

1. Axes: wage (vertical), quantity of labour or employment (horizontal).
2. Downward-sloping demand D; upward-sloping supply S.
3. Mark the equilibrium wage and employment where they cross.
4. For a shift, add a second curve, named D1 or S1.
5. Mark the new equilibrium and state the effect on wage and employment.

Shift	Effect on wage	Effect on employment
Demand right	Rises	Rises
Demand left	Falls	Falls
Supply right	Falls	Rises
Supply left	Rises	Falls

Worked reminder: Town T market (illustrative)

Wage	Demanded	Supplied
6	700	300
8	600	400
10	500	500
12	400	600
14	300	700

Equilibrium: wage 10, employment 500. Demand rises by 100 at every wage: new equilibrium wage 11, employment 550.

1.2.5 f) Trade unions

• Aims: higher wages, better conditions, job security, a voice for workers.
• Methods: collective bargaining, threat of industrial action.
• Possible gain: higher pay for members, safer conditions.
• Possible loss: if the wage is pushed above equilibrium, employment falls. At a wage of 12 in Town T, employment is 400, so 100 jobs are lost, while the 400 in work gain 2 an hour each.
• Firms may face higher costs, so higher prices or lower profit.
• Union action can also raise productivity through morale.

1.2.6 a), b) Policies for externalities

Policy	How it works	Advantage	Disadvantage
Tax	Raises the cost of the harmful activity	Raises revenue, polluter pays	Hard to set rate, inelastic demand limits effect
Subsidy	Lowers cost of cleaner or beneficial activity	Encourages green output	Costs taxpayers, dependency
Fine	Penalty for breaking a rule	Punishes, deters	Needs detection, harm already done
Regulation	Limit or ban	Certain, fast	Enforcement cost, no incentive to do better than the limit
Pollution permits	Cap and tradable permits	Certain cap, lower-cost cuts	Cap setting, monitoring, big firms may buy up permits

Worked reminder: tax

Chemical market: demand P = 100 − 2Q, private supply P = 20 + 2Q. Market output 20 at 60. External cost 16 a unit, so best output is 16 at price 68. A tax of 16 gets there. Revenue = 16 × 16 = 256. Consumers and producers each bear 128.

Worked reminder: fine

Firm saves 24,000 by dumping. Chance of being caught 30%. Fine 60,000: 0.3 × 60,000 = 18,000, no deterrent. Fine 100,000: 30,000, deterrent.

Worked reminder: permits

Firm X cuts at 40 a tonne, Firm Y at 15. Permit price 25. X must cut 20 tonnes: own cut costs 800, buying permits costs 500, a saving of 300. Y cuts 20 extra tonnes at 300 and earns 500, a gain of 200.

Evaluation points for any policy

• How much does it cost and who bears it?
• How easy to enforce?
• How certain is the result?
• Short run or long run?
• Effect on jobs, prices and competitiveness.

1.2.6 c) Regulating competition

Aim	Examples
Promote competition	Lower entry barriers, support small firms, stop unfair practices
Limit monopoly power	Ban cartels and price fixing, fine abuse of dominance, price caps, break up firms
Protect consumers	Safety rules, honest advertising and labelling, fair contracts, refund rights
Control mergers and takeovers	Investigate, block or set conditions when market share becomes too large

Worked reminder: merger

Shares 35%, 25%, 20%, 20%. The top two merge to 60%. Price rises from 8 to 10: +25%. On 50,000 units, consumers pay 100,000 more.

Evaluation: enforcement cost, possible economies of scale, whether new entrants can still arrive.

1.2.6 d) Minimum wage

Reasons: reduce poverty and inequality, stop exploitation, make work pay more than benefits.

Method in steps: minimum wage diagram

1. Draw the market with D and S and mark the equilibrium wage.
2. Draw a horizontal line at the minimum, above equilibrium.
3. Read quantity demanded (where D meets the line) and quantity supplied (where S meets the line).
4. The gap is unemployment. Employment is the quantity demanded.
5. To show an increase, raise the line: the gap widens.

A minimum below equilibrium has no effect.

Worked reminder: Town T

Minimum wage	Demanded	Supplied	Surplus of labour
12	400	600	200
13	350	650	300

At 12, employment falls from 500 to 400 (−20%). Wage bill: 10 × 500 = 5,000 before and 12 × 400 = 4,800 after.

Advantages	Disadvantages
Higher pay for those employed	Unemployment if above equilibrium
Less poverty and inequality	Higher costs and prices
Better motivation and spending	Informal work, enforcement cost
Less need for benefits	May not target poor households

Worked reminder: small firm

6 staff, 35 hours, 50 weeks = 10,500 hours. Wage 9.00 to 10.50 is +16.7%. Extra cost = 1.50 × 10,500 = 15,750.

Command words for this topic

Command word	What it asks for
State	One short sentence
What is meant by	A definition with two separate parts
Calculate	Show working
Draw	A diagram with the awardable points labelled
Explain	A fact plus two expansion points, in context
Analyse	An extended chain of reasoning in context
Assess	Weigh up factors using the information given
Evaluate	Reach a supported conclusion

Quick self-test

1. Define derived demand.
2. Give two reasons the labour supply curve might move right.
3. A firm has 30 workers who make 360 units a day. Calculate output per worker.
4. Output per worker rises from 12 to 15. Calculate the percentage increase.
5. At a minimum wage of 11, 300 workers are demanded and 380 supplied. State the surplus of labour.
6. Which way does the supply of labour shift if the school-leaving age rises?
7. A firm has a 30% chance of a 40,000 fine. Calculate the expected fine.
8. A tax of 6 a unit is paid on 200 units. Calculate the revenue.
9. State two ways a government can regulate competition.
10. A wage rises from 8 to 9. Calculate the percentage rise.

Answers

1. Labour demand that arises only because of demand for the product (two parts: demand for a factor, and the link to output).
2. Any two of: larger population, immigration, higher retirement age, higher female participation, more qualifications.
3. 360 ÷ 30 = 12 units.
4. (15 − 12) ÷ 12 × 100 = 25%.
5. 380 − 300 = 80 workers.
6. Left in the short run.
7. 0.3 × 40,000 = 12,000.
8. 6 × 200 = 1,200.
9. Any two of: ban cartels, block a merger, cap prices, enforce consumer protection laws.
10. (9 − 8) ÷ 8 × 100 = 12.5%.

Where marks are usually lost

• Shifting a curve for a wage change instead of moving along it.
• Drawing diagrams without labels or without the new equilibrium.
• Stating a minimum wage always causes unemployment, with no mention of where it is set.
• Forgetting the winners (those who keep jobs) as well as the losers.
• Listing advantages and disadvantages with no development.
• Writing about taxes in general when the question names a pollution context.
• Giving percentages with the wrong base: use the original figure.
• No working on a Calculate question.
• Explaining one policy when asked to evaluate between two.
• Ending an Evaluate answer without a conclusion.

Official syllabus

Pearson Edexcel International GCSE in Economics (4EC1) specification, Issue 3, February 2026, for first teaching September 2017, published by Pearson Education Limited: sections 1.2.5 The labour market and 1.2.6 Government intervention.