Guildhall School of Business and LawFE4055Understandingthe Business and EconomicEnvironment2020-21 Guildhall School of Business and LawThe Firm in the FactorMarket: Labour Market &Capital MarketGuildhall School of Business and LawThe UK Labour Market• Trends in the UK labour market• advances in technology• changes in the pattern of output• competitiveness of international markets• rise in part-time employment• rise in female participation rates• rise in temporary employment• rise in zero-hour contractsGuildhall School of Business and LawMarket-determined Wage Rates and Employment• Perfect labour markets• assumptions of a perfect labour markets• everyone is a wage taker• freedom of entry• perfect knowledge• homogeneous labour• determination of the market wage• horizontal supply curve to individual employers• horizontal demand curve for individual workersGuildhall School of Business and Law• The supply of labour• supply of hours by an individual worker• marginal disutility of work• income and substitution effects of wage changes• the shape of the individual’s labour supply curve• supply of labour to an individual employer• market supply of a given type of labour• position of the curve• number of qualified people• non-wage benefits• desirability of alternative jobs• elasticity of the market supply of labour• the mobility of labourMarket-determined Wage Rates and EmploymentGuildhall School of Business and Law• The demand for labour: marginal productivitytheory• the profit-maximising approach• measuring the marginal cost and revenue of labour• marginal cost of labour (MCL)• the marginal revenue product of labour (MRPL)• the profit-maximising level of employment• derivation of the firm’s demand curve for labourMarket-determined Wage Rates and EmploymentGuildhall School of Business and Law• Elasticity of demand for labour• determinants• price elasticity of demand for the good• ease of factor substitution• elasticity of supply of complementary factors• elasticity of supply of substitute factors• ratio of wage costs to total costs• time period• Wages and profits under perfect competitionMarket-determined Wage Rates and EmploymentGuildhall School of Business and LawPower in the Labour Market• Types of labour market power• monopsony power of employers• monopoly power of trade unions• Firms with monopsony power in employing labour• MCL > W (ACL)• effects on wages and employmentGuildhall School of Business and LawPower in the Labour Market• Unions with monopoly power• Unions facing competitive employers• effects of wage increases on employment• productivity deals• Bilateral monopoly• no unique equilibrium• relationship between wages and employment• how a rise in wage rates could lead to an increase inemploymentGuildhall School of Business and LawPower in the Labour Market• Collective bargaining• union threats and promises• employers’ threats and promises• The outcome of negotiations• power• attitudes• union’s membership• scope for movement• bargaining skills• information• Role of government• Fall in union membershipGuildhall School of Business and LawPower in the Labour Market• The efficiency wage hypothesis• meaning of efficiency wage rates• why might higher wage rates lead to higher productivity?• less ‘shirking’• reduced labour turnover• improved morale• in which parts of the labour market are efficiency wagerates likely to be paid?Guildhall School of Business and LawLow Pay and Discrimination• Low pay• identifying workers who are low paid• decency threshold• relative wages: proportion of median or mean• low pay in particular sectors/industries• the growth in low pay• recessions of the early 1980s and early 1990s• technological change• competition from developing countries• the growth in part-time employment• changes in labour lawsGuildhall School of Business and LawLow Pay and Discrimination• Minimum wages• international comparisons of minimum wage rates• regional minimum wages• a living wage• Economic effects of minimum wages• effects in competitive markets• effects in monopsonistic markets• evidence on the effects of a minimum wageGuildhall School of Business and LawLow Pay and Discrimination• Gender and the labour market• evidence on wage inequality• causes of inequality between the sexes• types of employment affecting marginal productivity• career breaks• differences in mobility• union membership• a greater proportion of women than men work part time• custom and practice• prejudice and discrimination• has the gender pay gap narrowed?Guildhall School of Business and LawThe Flexible Firm and the Market forLabour• Flexible labour markets• the flexible firm• functional flexibility• numerical flexibility• financial flexibility• core workers and peripheral workers• Implications for wages• The Japanese model• total quality management• elimination of waste, ‘just-in-time’ methods• team work• functional and numerical flexibilityGuildhall School of Business and LawThe Pricing of Capital and Capital Services• The price of capital versus the price of capital services• capital prices and capital rental rates• stocks and flows• Profit maximising employment of capital• marginal cost of capital (MCK)• marginal revenue product of capital (MRPK)• profit maximising in perfect capital markets• profit maximising given monopsony power in capital marketsGuildhall School of Business and LawDemand and Supply of CapitalServices• The demand for capital services• individual firm’s demand• market demand• The supply of capital services• supply to a single firm• supply by a single firm• short-run MC• long-run MC• market supply• Determination of the price of capital servicesGuildhall School of Business and LawInvestment Appraisal• Capital for purchase: investment• Investment demand• calculating the benefits of investment• discountingbenefit minus cost (1 )ttrΠNPV =å+=Π÷ present value approach° project is profitable if NPV > 0÷ rate of return approach° project is profitable if value of r for project to break even (NPV = 0) isgreater than the rate of interest¡ the risks of investment¡ government investment decisions÷ factors other than NPV that governments are likely to take intoaccount° non-monetary costs and benefits° political considerationsGuildhall School of Business and Law• The supply of capital• supply of physical capital• supply of finance• Determination of the rate of interest• Calculating the costs of capital• sources of investment finance• retained profits• borrowing from the banking sector• share issueInvestment AppraisalGuildhall School of Business and Law• Calculating the costs of capital (cont.)• leverage and the cost of capital• leverage and the risks to suppliers• measures of leverage• gearing ratio• debt/equity ratio• risk premiaInvestment AppraisalGuildhall School of Business and LawRatio Analysis• Ratios to measure success• Profitability ratios• Gross Profit Margin (GPM)• Net Profit Margin (NPM)• Return on Capital Employed (ROCE)• Financial efficiency ratios• Asset Turnover• Stock Turnover• Debtor and Creditor Days• Liquidity ratios• Current Ratio• Acid Test RatioGuildhall School of Business and LawFinancing Investment• Sources of business finance• internal sources• external sources• short-term finance• medium-term finance• long-term finance• international sources• comparison of the UK with EU countries• conflict between financing growth and shareholderinterests• take-over constraintGuildhall School of Business and LawFinancing Investment• The role of the financial sector• expert advice• expertise in channelling funds• maturity transformation• risk transformation• The banking system• retail banking• wholesale banking• universal banks• bank diversification• inter-bank lending• the LIBOR, SONIA, Euribor and Eonia• the integration and vulnerability of banksGuildhall School of Business and LawThe Stock Market• The role of the Stock Exchange• primary market• secondary market• advantages• brings together savers and firms seeking investment• regulates firms and helps encourage confidence• facilitates mergers and takeovers• reduces transaction costs of investment finance• disadvantages• cost of getting listed• possible short-termism and instabilityGuildhall School of Business and LawThe Stock Market• Is the stock market efficient?• the efficient market hypothesis• weak form of efficiency• where share dealing prevents cyclical fluctuations in shareprices• semi-strong form of efficiency• where share prices adjust fully to publicly available information• chances, however, of ‘insiders’ gaining• strong form of efficiency• where share prices adjust fully to all relevant information(including ‘inside information’)
