ECONOMICS
Johnson Hsu
July 2014
Economics of work and
leisure
1. Nature of work and leisure and trends in
employment and earnings
2. Market Structures and competitive
behavior in leisure markets
3. Labour demand, supply and wage
determination
4. Market failure and the role of the
government and union in the labour
market
Derived demand
 Demand for one item depending
on the demand for another item
Labour Derived Demand
A firm’s demand for
labour
 Demand and expected future demand for the
product produced and the revenue that can be
earned from the output.
 Productivity. The higher the output per
worker hour, the more attractive labour is as a
resource.
 Wage rate.
 Complementary labour costs.
 The price of other factors of production.
Marginal revenue
product (MRP)

The change in a firm’s revenue
resulting from employing one more
worker
MRP Assumptions
1. Productivity of labour can be
measured
2. All FOP except labour are fixed
MRP Assumptions
Marginal product of
labour (MPL)
 The change in output that results
from employing one more worker
Marginal revenue
product
No of
workers
Total
output
Marginal Marginal
product revenue
MR
Product
Total
revenue
1
20
20
x20
= 400
400
2
80
60
x20
=1,200
1,600
3
160
80
x20
=1,600
3,200
4
220
60
x20
=1,200
4,400
5
260
40
x20
= 800
5,200
6
280
20
x20
= 400
5,600
The elasticity of demand
for labour
% change in the quantity of labour
demand
-----------------------------------------% change in wage rate
The factors that influences the
elasticity of demand for labour
 The price elasticity of demand for the product
produced.
 The proportion of wage costs in the total costs.
 The ease with which labour can be substituted
by other factors.
 The elasticity of supply of complementary
factors.
 The time period.
Elasticity of demand: A summary
Elasticity
completely
elastic
Responsivene
ss to a price
change
Effect on total
spent
Example
Unitary
elasticity
inelastic
Quantity demanded is very
responsive to a change in price
Quantity
demanded as
price change
Quantity demanded is
unresponsive to a price change
As the price falls, the total
revenue rises. As the price
rises. total revenue falls. Total
revenue moves in the opposite
direction to price.
Total amount
spent remains
unchanged by
changes in
price.
As price falls, total revenue falls.
As price rises. total revenue rises.
Total revenue moves in the same
direction as price.
1.
2.
3.
4.
elastic
Many substitutes for the
goods
Large items in a budget
Luxury items
Passage of a long period
of time
1.
2.
3.
4.
completely
inelastic
Few substitute
Small items in budget
Essential items
Passage of a short period of
time
How does MRP determine the
demand for labour curve?
How does MRP determine the
demand for labour curve?
What factors determine a shift
in the demand for labour?
Flexible labour market
 A labour market that adjusts
quickly and smoothly to changes
in the demand for and supply of
labour
Backward-sloping labour
supply curve

A labour supply curve showing
the substitution effect
dominating at low wages and the
income effect dominating at high
wages
Backward Bending
Supply Curve
Substitution effect (+)
 If wages increase then leisure is
more expensive as it has a higher
OC. Therefore workers are likely to
increase the supply of their labour
as wages increase. The effect is
always positive.
Income effect (+ & -)
If wages rise then the workers income will
increase. This may create an incentive to work longer
to obtain greater income allowing for the purchase of
G/S that he/she will derive utility from consuming.
This effect is positive i.e. an increase in W = increase
in supply L.
However higher wages may allow them to meet a
target income where they have the G/S they demand
and instead place a higher value on their leisure time.
In this instance the income effect is negative and
causes a fall in supply with an increase in wages.
Job satisfaction survey
Income effect of a wage
rist
 The effect on the supply of labour
demand caused by the change in the
ability to buy leisure
Substitution effect of a
wage rise
 The effect on the supply of labour
caused by a change in the opportunity
cost of leisure
Long-run supply curve of
labour influenced by
 Pecuniary factors
 Non-pecuniary factors
Pecuniary factors
 The wage rate
 The opportunity to work overtime
 The possibility of bonues
Non-pecuniary factors
1) The convenience and flexibility of hours
2) Status
3) Promotion chances
4) Flexibility of location
5) Qualifications and skills
6) Job security
7) Pleasantness of the job
8) Holidays
9) Perks and fringe benefits
10) The quantity and quality of training on offer
11) Location
12) The recent performance of the firm/occupation
The elasticity of supply of
labour
% change in the quantity of labour
supplied
------------------------------------------% change in wage rate
The elasticity of supply of
labour
 The responsiveness of the supply
of labour to a change in the wage
rate
The factors influence the
elasticity of supply of labour
 The qualifications and skills
required.
 The length of training.
 The immobility of labour.
 The time period.
Wage determination
 In a competitive labour market,
the demand for and the supply of
labour play the key roles in
determination wage rate.
Diagram of Wage
Determination
Diagram of Wage
Determination
 The equilibrium wage rate in the industry
is set by the meeting point of the industry
supply and industry demand curves.
 In a competitive market firms are wage
takers because if they set lower wages
workers would not accept the wage.
 Therefore they have to set the equilibrium
wage We.
Diagram of Wage
Determination
 The firm will maximise profits by
employing at Q1 where MRP of Labour
= MC of Labour
 The wage rate in the industry is
determined by the equilibrium
position of supply and demand. A
change in a given variable may shift
the supply or demand curve.
Other influence on wage
determination
The relative bargaining power of
employers and workers
 Government policy and public
opinion

Why there is a wage
difference?
Ans:
differences in wages was due to the
differences in demand and supply,
bargaining power, the impact of
government policy and public opinion.
Wage differentials
between particular groups
 Skilled and unskilled workers
 Male and female workers
 Part-time and full-time workers
Supply of labour in the
long run
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Shifts in the Supply of Labour
What factors other than wage rates will
cause people to change either their
hours or occupation?
Economic rent
 A surplus paid to a factor of
production above what is needed
to keep it in its current occupation
Economic rent
 Example – doctors are in almost perfectly
inelastic supply because the number of
places available to study medicine is
determined by the government and the
profession. To the extent that the demand
for doctors exceeds the supply, they will be
able to negotiate higher salaries than most
could earn as research scientists or in
other occupations
Transfer earnings
 The amount a factor of production
could earn in its best alternative
occupation; the minimum amount
that has to be paid to ensure that a
worker stays in her/his present job:
if her/his wage falls below this level,
s/he will transfer to the alternative
employment
Transfer earnings
 Example - a man may decide to work as a shop
assistant because they pay is better than if he was
a waiter. By making this decision he forgoes the
opportunity to work at, for example, Pizza Express.
The opportunity is seen in terms of this forgone
alternative. If Pizza Express were to raise its wage
rates in order to attract more staff, there would
come a point where the shop assistant might
reconsider his decision and decide to be a shop
assistant after all, as the opportunity cost of being
a shop assistant has risen.
Fisherman "Gone Phishing" earns
around £500 per week, but could earn
£300 in his next best job as a hairdresser.
What is the current level of transfer
earnings and economic rent for Mr
Phishing?
Ans:
1) Transfer earning is the minimum amount of a factor
must earn to remain in its present use. £500
2) Economic rent= Present earnings – transfer
earnings= £500 - £300=£200