abor Demand and Supply
Running Header: Market Equilibration Process Paper
Labor Demand and Supply
Economics ECO/561
April 21, 2011
Running Header: Market Equilibration Process Paper
Introduction
The purpose of this paper is to relate the concepts of the market equilibrating process to a prior real-world experience occurring in a free market. The market equilibrating process will be explained and the following components will be considered in the explanation; Law of demand and the determinants of demand, law of supply and the determinants of supply, labor demand and supply.
Law of Demand and the Determinants of Demand
According to Economics: Principles, problems, and politics, a fundamental characteristic of demand is this: Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. In short, there is a negative or inverse relationship between price and quantity demanded. Economists call this inverse relationship the law of demand and the determinants are the “other things equal” in the relationship between price and quantity demanded (McConnell, Brue and Flynn, 2009).
Law of Supply and the Determinants of Supply
According to Economics: Principles, problems, and politics, the law of supply states that as price rises, the quantity supplied rises; as price falls, the quantity supplied falls and the basic determinants of supply are, resource prices, technology, taxes and subsidies, prices of other goods, producer expectations, and the number of sellers in the market (McConnell, Brue and Flynn, 2009).
Running Header: Market Equilibration Process Paper
Labor Demand and Supply
The demand and supply of labor are determined in the labor market. The participants in the labor market are workers and companies. Workers supply labor to company’s in exchange for wages as shown in a circular flow model. Companies demand labor from workers in exchange for wages. If the demand for the company’s output increases, the company will demand more labor and will hire more workers. If demand for the company’s output falls, the company will demand less labor and will reduce its work force.
Consider a perfectly competitive company that uses labor as an input. The company faces a market price of $10 for each unit of its output. The total product, marginal product, and marginal revenue product that the company receives from hiring 1 to 5 workers are reported in Table 1
TABLE 1 MARGINAL REVENUE PRODUCT OF LABOR
Labor input(workers) | Total Product(number of goods) | Marginal product of labor | Marginal revenue product of labor |
0 | 0 | - | - |
1 | 9 | 9 | $90 |
2 | 17 | 8 | 80 |
3 | 22 | 5 | 50 |
4 | 25 | 3 | 30 |
5 | 26 | 1 | 10 |
The marginal revenue product of each additional worker is found by multiplying the marginal product of each additional worker by the market price of $10. The marginal revenue product of
Running Header: Market Equilibration Process Paper labor is the additional revenue that the company earns from hiring an additional worker; it
