Download I. Introduction and Overview.

Women, Men, & Work
Professor Karen Leppel
Introduction and Overview
of Supply & Demand
in the Labor Market
Economics:
The study of the allocation
of scarce resources.
Because resources are scarce,
people need to make choices. You
need to decide between alternatives,
because you can not do everything.
To do option A, you have to give up
the opportunity to do option B. So,
option B is the opportunity cost of
option A.
As you discovered in Microeconomics, the
theory of supply and demand underlies
much of economics. We, therefore, will
review briefly here the basics of supply and
demand analysis.
Law of Demand
There is a negative relation between the price
of a item and the amount of the item that
buyers are willing to purchase.
Law of Supply
There is a positive relation between the price
of a item and the amount of the item that
suppliers are willing to provide.
The laws of demand and supply can
also be applied to the labor market.
Demand side:
The higher the price of labor or wage for a
job, the less labor firms will want to hire.
Three Reasons for Negative Relation between
the Wage and the Quantity Demanded of Labor
1. Diminishing Marginal Productivity
Additional units of labor provide progressively
less additional output when combined with
given amounts of capital (plant & equipment).
So employers are only willing to hire additional
labor at lower and lower wages.
Three Reasons for Negative Relation between
the Wage and the Quantity Demanded of Labor
2. Substitution Effect
When the price of an input changes, while the
price of a substitute input remains the same,
profit-maximizing employers will tend to use
more of the one that is now relatively cheaper
and less of the one that is now relatively more
expensive.
Three Reasons for Negative Relation between
the Wage and the Quantity Demanded of Labor
3. Scale Effect
As wages increase, the price of the product
increases, and less of it is purchased. So, fewer
workers are needed to produce the product.
So the demand curve slopes downward.
wage
Demand
Quantity of labor
Supply side:
The higher the price of labor or wage for
a job, the greater the number of workers
who are willing to work in the job.
So the supply curve slopes upward.
wage
Supply
Quantity of labor
This positive relation applies to the
number of individuals available for a
job, but not necessarily to the number of
hours worked by a particular individual.
We’ll discuss this in more detail later in
the course.
When the quantity demanded is equal
to the quantity supplied, we have
equilibrium.
Equilibrium means that there is no
tendency for things to change. The
system is in balance.
wage
Equilibrium occurs at the intersection
of the supply and demand curves.
equilibrium
Supply
Demand
Quantity of labor
wage
The equilibrium quantity can be
read from the horizontal axis.
equilibrium
Supply
Demand
Quantity of labor
equilibrium quantity
wage
The equilibrium wage can be
read from the vertical axis.
equilibrium
equilibrium
wage
Supply
Demand
Quantity of labor
equilibrium quantity
Recall the distinctions between
a change in demand
and
a change in quantity demanded,
and between
a change in supply
and
a change in quantity supplied.
Change in Quantity Demanded
• a movement along a particular demand curve
• the result of a change in the price of the item
in question.
For example, the quantity demanded of
accountants will decrease if there is an increase
in the wage of accountants.
If the wage increases from $20 to
$30, quantity demanded decreases
from 500 to 450.
wage
30
20
Demand
450 500
quantity of
accountants
The demand curve does not shift when the
price of an item changes! We simply move
from one point on the curve to another point
on the same curve.
Change in Demand
• a shift of the entire demand curve
• happens when there is a change in something
other than the price of the item in question.
wage
For example, the demand
for accountants will
increase if new laws
make preparing your own
taxes more complicated.
New Demand
Demand
quantity of
accountants
Change in Quantity Supplied
• a movement along a particular supply curve
• the result of a change in the price of the item
in question.
For example, the quantity supplied of
accountants will increase if there is an increase
in the wage of accountants.
wage
If the wage increases from $20 to $30,
quantity supplied increases from 575 to 600.
Supply
30
20
475 500 525 550 575 600 625
quantity of
accountants
The supply curve does not shift when the
price of an item changes! We simply move
from one point on the curve to another point
on the same curve.
Change in Supply
• a shift of the entire supply curve
• happens when there is a change in something
other than the price of the item in question.
wage
Supply
New Supply
For example, if low cost
government training programs
make it easier to get trained as
an accountant, the supply of
accountants would be expected
to increase.
quantity of
accountants