Chapter 4, Problem 1SCQ

In the labor market, what causes a movement along the demand curve? What causes a shift in the demand curve?

To determine

The reasons why there is a movement along the demand curve and shifts in the demand curve in the labor market.

Explanation of Solution

In the labor market, when there are changes in the wage rate, there is a movement along the demand curve. When the wage rate is high, the demand for labor is low and when the wage rate is low, the demand for labor is high.

This is due to the fact that, when the wage rate is high, the firms will need to pay higher wages to all the labor so the demand for labor will be low.

If there are changes to other factors other than price, such as change in the output, change in the production process, technology, then this will lead to a shift in the demand curve.

When there is an increase in the technology of production, despite being no change in the wage rate, it will lead to a decrease in demand and this is shown by a backward shift in the demand curve for labor. Similarly, when there is a sudden need to increase output, at the prevailing wage rate, they might want to use more labor, which leads to a rightward shift in the demand for labor.

Economics Concept Introduction

Concept introduction:

Law of demand- There is an inverse relationship between the price (wage rate) and the quantity demanded (demand for labor). When wage rate rises, demand for labor falls and vice versa.

Changes in demand- When there is a change in the variable such as price (here, wage rate) we see that there is a movement along the demand curve. When there is an increase in the wage rate, there is decrease in the demand for labor and vice-versa.

When there are changes other than the wage rate (such as changes in output, production process), we see that there is a shift in the demand curve. Rightward showing an increase in demand and backward showing a decrease in demand