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Labor Market

In: Business and Management

Submitted By asorum
Words 1553
Pages 7
Question 1:

1: Explain why the labour demand curve is always downward sloping.
The labor demand curve is affected by the wage in two ways. First, higher wages imply higher costs, which leads to higher product prices in order to cover the costs. This usually lowers the costumer demand, and the firms reduce their output, and need less employment. This is what we call the scale effect. The other effect is the substitution effect, where we assume that the price of capital is held constant. When wages increase the relative price of capital decreases, and the firms shift towards a capital-intensive mode of production.

These two effects are the reasons why the labor demand curve is downward sloping.

2: Why would we expect that the slope of the labour demand curve of a firm in man- ufacturing is flatter than the slope of the labour demand curve of the entire manu- facturing sector.
When the wages increase, the costs increase, and this leads us to increased product prices, which will lead to a decrease in the demand of the product. Because of this, the employment will decrease. Given these facts, we see that the wage’s final effect on employment depends on the elasticity of demand for the product. Because a single firm has a higher elasticity of demand than the entire market, their labor demand curve is flatter than the labor market demand curve of the entire market.

3: Derive the labour market equilibrium for the manufacturing sector if the demand for manufacturing goods increases. Describe your analysis and point out what factors are unchanged and how the equilibrium changes. How is the equilibrium outcome for a single firm affected?
The labor market equilibrium is determined in the intersection point between the labor demand curve and the labor supply curve. The demand curve is downward sloping, while the supply curve is upward sloping, because...

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