classical labour market, A rise in the real wage will bring a decrease in the quantity, Macroeconomics

classical labour market, Macroeconomics

Assignment Help:

A rise in the real wage will bring a decrease in the quantity demanded of labor because of diminishing returns in production. As more and more labor is employed, it is increasingly less productive. Firms will seek to maximize profits, which means that they will continue to employ labor as long the marginal product exceeds the real wage paid. The last hour of labor hired will be that hour where the marginal product is equal to the real wage. If the real wage increases, the firm will then find that the marginal product of the last labor hour is less than the real wage. This decreases profits, so the firm will reduce the amount of labor it employs unless once again the marginal product of the last hour of labor employed is equal to the real wage.

5. An increase in the real wage will increase the quantity of labor supplied for two reasons: the hours supplied per person will increase; and the labor force participation rate will increase. When the real wage increases the opportunity cost of leisure, which means that households will be willing to supply more labor. This will increase the households'' incomes, which will increase the households'' demand for all normal goods, including leisure. However, this income effect is assumed to be smaller than the opportunity cost effect, so the hours per person will increase. When the real wage increases, the relative value of other productive activities decreases. This means that more people who had previously chosen not to be part of the labor force because the real wage was less than the value of other productive activities are now more likely to find the real wage higher than alternatives and will chose to enter the labor force.

6. If the real wage is above or below the full-employment level there will be a surplus or shortage of labor that will then cause the real wage to adjust. For example, if the real wage is above the full-employment level, there is a surplus of labor. This will cause the real wage to fall. If the real wage is below the full-employment level, then (in the long run) there is a shortage of labor and this will cause the real wage to rise. In either case, the real wage will adjust until the surplus or shortage is eliminated and the labor market is in equilibrium at full-employment.

7. Potential GDP is determined from the labor market equilibrium. When the labor market is in equilibrium, there is full employment. This is the amount of employment which in turn determines the amount of potential GDP.

Write Your Message!

Name

Email id

Message

Verfication Code

User Account

All Pages

classical labour market, Macroeconomics

Related Discussions:- classical labour market

Differentiate economic growth and economic development, Differentiate econo...

Problem with the keynesian model, The problem with the Keynesian model ...

Result of an export subsidy, Which of the following is a result of an expor...

What is money wage rate, What is money wage rate While the money wage ...

Estimate paper by stock and watson in a bayesian manner, estimate paper by ...

Price of dvd players decreases, If the price of DVD players decreases, we c...

Health care cost of capital, In 2004, Olentangy health care cost of capital...

Unplanned and planned investment spending, A sudden decrease in the growth ...

Is consumption depend on GDP in the cross model, Q. Is Consumption depend o...

Process of leave, The yeild of Maize is 73429 Hg/Ha, I need to translate it...

Write Your Message!

Featured Services

Online Tutoring

Project Development

Exam Preparation

Course Help

Assignment Help

Popular Subjects

Assured A++ Grade

Academics

Major Subjects

Majors

Get In Touch

TERMS & POLICIES

HELP & SUPPORT