In which situation is it likely that the demand for labour would be inelastic?

Analyze the question: We are asked when the demand for labour is inelastic, meaning a change in the wage rate causes only a small change in the quantity of labour employers demand.

Concept: Determinants of the elasticity of demand for labour (Marshall's rules of derived demand)

Labour demand is a derived demand (it depends on demand for the product labour makes). It is more inelastic when:

1. Labour cannot easily be substituted by capital (few substitutes).
2. Labour cost is a small proportion of total cost of production.
3. Demand for the final product is inelastic.
4. Time period is short (firms cannot quickly adjust).

Step-by-step evaluation of the options:

• A. Labour and capital are close substitutes: If wages rise, firms easily switch to machines, so demand for labour falls a lot. This makes demand elastic, not inelastic. ✗
• B. Labour costs are only a small proportion of total costs: If wages rise, total costs hardly change, so firms do not cut back much on workers. Demand for labour is inelastic. ✓
• C. Demand for the final product is elastic: A wage rise raises prices, consumers cut purchases sharply, and firms reduce output and labour a lot. This makes labour demand elastic. ✗
• D. A large quantity of unemployed labour is available: This concerns the supply of labour (it makes supply more elastic), not the elasticity of labour demand. ✗

Answer: Option B.

Exam tip: Remember "SPEC" for inelastic labour demand: Substitutes are few, Proportion of labour cost is small, Elastic product demand is absent (product demand is inelastic), Compressed (short) time period. If an option makes it easy for firms to cut labour when wages rise, demand is elastic.