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

Quantity of labor

Demand

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

Quantity of labor

Supply

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.

Equilibrium means that there is no tendency for things to change. The system is in balance.

When the quantity demanded is equal to the quantity supplied, we have equilibrium.

wage

Quantity of labor

Supply

Demand

equilibrium

Equilibrium occurs at the intersection of the supply and demand curves.

wage

Quantity of labor

Supply

Demand

equilibrium quantity

The equilibrium quantity can be read from the horizontal axis.

equilibrium

wage

Quantity of labor

Supply

Demand

equilibrium quantity

equilibrium wage

The equilibrium wage can be read from the vertical axis.

equilibrium

Recall the distinctions betweena change in demand

and a change in quantity demanded,

and betweena 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.

wage

quantity of accountants

3020

450 500

Demand

If the wage increases from $20 to $30, quantity demanded decreases from 500 to 450.

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

quantity of accountants

Demand

For example, the demand for accountants will increase if new laws make preparing your own taxes more complicated.

New Demand

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

quantity of accountants

3020

475 500 525 550 575 600 625

Supply

If the wage increases from $20 to $30, quantity supplied increases from 575 to 600.

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

quantity of accountants

SupplyNew 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.