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Wize AP Microeconomics Textbook > Labor Market

Demand and Supply of Labor

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Demand and Supply of Labor

In this section we see the difference between supply and demand for labor and what factors cause each line to shift.

Demand for Labor

The demand for labor is downward sloping because as more workers are hired the Value of Marginal Product (Marginal Revenue Product) falls, so firms are willing to pay a lower wage for each additional worker.


  • In the diagram above, if the wage is $50, the firm will demand a quantity of
    20
    units of labor.
  • On the left of 20 the VMP (MRP) is
    higher
    than the wage so the firm will demand
    more
    labor.
  • On the right 20 the VMP (MRP) is
    less
    than the wage so the firm will demand
    less
    labor.

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Shifts in Demand
  1. Output price - higher prices of the product will cause VMP(MRP) to
    increase
    and shift the labor demand
    right
  2. Technological change - improvements in technology will shift the demand
    left or right
  3. Supply of other factors - if the supply of another factor (like paper used to make books) decreases then the marginal product of labor will
    decrease
    and labor demand will shift
    left

PAGE BREAK

Supply of Labor

The supply is upward sloping because as the wage rises, the opportunity cost of leisure gets
higher
so workers will work
more
hours


PAGE BREAK

Shifts in Supply
  1. Changes in Tastes - this could include things like if more women join the labor force it would cause supply of labor to shift
    right
  2. Changes in Alternative Jobs - if other companies pay less, the supply of workers in this company will shift
    right
  3. Immigration - if there is more immigration, supply of workers would shift
    right

In the diagram above, if supply of labor shifts right, the equilibrium wage will
decrease
and employment will
increase
.

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Example: Demand and Supply of Labor

If there is a technological advancement that causes an increase in the marginal product of labor, this would cause equilibrium wage to ________ and employment to ________.

A) decrease; increase
B) increase; decrease
C) increase; increase
D) decrease; decrease


C
If workers become more productive due to faster machines, their marginal product and marginal revenue product (VMP) increase causing the demand for those workers to also increase. The causes equilibrium wages and employment to increase.

Practice: Demand and Supply of Labor

When companies are competitive and trying to maximize their profit, the demand curve for labor is determined by