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.


Related Discussions:- classical labour market

Find real interest rate and nominal interest rate, #questionAssume that an ...

#questionAssume that an economy''s GDP Y=5000. Also assume that the government runs a deficit where tax revenue T=1000 and government expendituresG= 1500. The consumption function

Describe the macroeconomic variables, Q. Describe the macroeconomic variabl...

Q. Describe the macroeconomic variables? In this section we have summarizes all the macroeconomic variables. The first column denotes the symbol we use for variable whereas col

Financial payments flow between firms and government, Explain whether, the...

Explain whether, the following statements are TRUE, FALSE or UNCERTAIN. Briefly justify your answer. (i) The circular flow shows how real resources and financial payments flow

Dynamic Multiplier, Discuss the concept of dynamic multiplier.

Discuss the concept of dynamic multiplier.

Propensity, different determinants of propensity to consume

different determinants of propensity to consume

Explain the excise terms of tax, Explain the excise terms of tax. The e...

Explain the excise terms of tax. The excise terms of tax: a. Tax incidence b. Excess burden c. Deadweight loss d. Tax revenue

International trade, how can a country maintain equilibrium GDP with foreig...

how can a country maintain equilibrium GDP with foreign trade?

Licensed drivers revealed the following number of speeding, A sample of 2,0...

A sample of 2,000 licensed drivers revealed the following number of speeding violations. 0 violations for 1,910 drivers. 1 Violations for 46 drivers. 2 violations for 18 drivers. 3

Michaels indifference curve and dwights indifference curve, Suppose that Mi...

Suppose that Michael and Dwight each have a $60 weekly entertainment budget. They pay the same prices for two goods, "an evening reading books" (an ERB) and "an evening of beer and

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd