CHAPTER 6

LABOUR MARKET

CONTENT

Labour supply
Labour demand
Equilibrium in labour market

I. LABOUR SUPPLY
1.

Definition

The number of working hours that worker is willing to work

and able to work at various wage levels in a certain time,
ceteris paribus
w

Diagram:

SL

l, t

I. LABOUR SUPPLY
2. Determinants in labour supply function
- Wages
- Economic pressure
- Social pressure
- Time restrain/limitation

I. LABOUR SUPPLY
MU rest

MU working

t*
24-t*

II. LABOUR DEMAND

1. Definition

- The number of working hours that employer is willing to hire

and afford to hire at various wage levels in a certain time,
ceteris paribus
W

Derived demand

Diagram:
DL
t,l

II. LABOUR DEMAND

2. Determinants in labour demand function
- Wages
- Quality of employee
- Demand of goods and services

II. LABOUR DEMAND

3. Marginal revenue product of labour (MRPL)
The change in total revenue results from the change in
number of employee
MRP

TR Q
.
= MR . MPP
Q L

MRPL is a downward sloping curve

II. LABOUR DEMAND

4. Optimal employment
MRPL > w: Expanding
employment
MRPL < w: Restraining
employment
MRPL = w: Optimal
employment

w
w*

MRPL is the labour demand

curve
MRPL
t,l

III. EQUILIBRIUM IN LABOUR MARKET

1. Equilibrium in a perfect competition market
w

w
SL

w*

w*

DL

MRPL
t,l

t,l

III. EQUILIBRIUM IN LABOUR MARKET

2. Equilibrium in monopsony market

-

A market, where there is

only one buyer/ employer

Some definitions:

MICL

+ Total Inputs Cost (TICL): Total

cost paid for labour
TICL = w.L
+ Marginal Inputs Cost (MICL):
The change in total cost results
from the change in number of
hired labour

MIC L =

SL

w*1
DL=MRPL

TIC L
=
L

l*1

t,l

III. EQUILIBRIUM IN LABOUR MARKET

2. Equilibrium in monopoly market

- A market where there is
only one supplier/
employee
MC

W*2

MRL

DL=MRPL

l*2

III. EQUILIBRIUM IN LABOUR MARKET

4. Duopoly
- A market where there
are only one supplier
and one buyer

MICL

W*2
SL=MC

w*3
W*1
MRL

DL=MRPL

l*2 l*1