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

Online homework, I want you to do online homework as you did before on apl...

I want you to do online homework as you did before on aplia.com All questions are 10. They are in Aggregate Demand and Aggregate Supply The deadline within 24 hours. Please do

What do you mean by gross domestic product, Q. What do you mean by Gross do...

Q. What do you mean by Gross domestic product? Perhaps the most significant concept in macroeconomics is Gross Domestic Product (GDP): Gross Domestic Product (

Determine the exchange rate, Q. Determine the Exchange rate? Exchange r...

Q. Determine the Exchange rate? Exchange rate is determined by the ratio of domestic price level to the foreign price level. If, for instance domestic prices increase by 10% wh

Classical model, using a graph of the classical labour market,illustrate th...

using a graph of the classical labour market,illustrate the effects of a real wage existing in the market that is lower than the equilibrium real wage.What will eventually happen i

What is the meaning of deindustrialisation, What is the meaning of Deindust...

What is the meaning of Deindustrialisation Deindustrialisation or structural decline of many manufacturing industries along with activities like coal mining is associated with

Give detail introduction of central banks, Give detail introduction of Cen...

Give detail introduction of Central banks A central bank is a public authority that is responsible for monetary policy for a country or a group of countries. Two important cen

Why are bank deposits money?, Money is anything which is acceptable in sett...

Money is anything which is acceptable in settlement of a debt. But, paradoxically, the main asset used to settle debts in modern economies is other debts. After all, bank deposits

Indifference curves are straight lines, If the indifference curves are stra...

If the indifference curves are straight lines with slope s, and the budget constraint is given by: x*p1+y*p2 = m, then describe the optimal choice of the consumer.

Multiplier, multiplier static and dynamic

multiplier static and dynamic

Unemployment, Why do we still have problem of "unemployment" ? How could we...

Why do we still have problem of "unemployment" ? How could we solve the problem? Which one is better fixed or flexible exchange rate of unemployment ?

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