# Labor Market Equilibrium

Demand of Labor
Firms' demand MRP = MR X MP. Therefore, firm's demand for labor depends upon marginal revenue
generated from each unit of output and the productivity of each labor unit.
MR: Marginal revenue will increase as price of output increases, Firm will demand more labor when
output's price gets higher.
MP: Productivity increase will increase demand for labor also. If there is a technological advance, causing
the labor proportion to machinery changes, labor demand will change. If more labor is needed per
machinery, labor demand will increase, otherwise, labor demand will decrease as machine replaces human
labor. Investment in human capital, such as training and education, can increase productivity, too.
Therefore, high skill workers face a higher demand than low skill workers.
Supply of Labor
The main determinant of labor supply is the wage rate. At the lower portion of the supply curve, people
are willing to supply more labor hours when wage increases. However, labor supply curve will bend
backwards at the higher wage rate, indicating a negative relationship between wage rate and labor supply
quantity. This is due to the income effect. As people gets richer, they need time to spend their income. So
they will take time off from work to enjoy life. Less labor hours will be supplied as a result.
Other determinants of Labor supply are:
1. Adult population: increase in population will increase work force, and labor supply.
2. Preferences: as more woman or retired people choose to work, labor supply increases.
3. Time in school and training: when people spend more time in school, the low skill labor supply decrease,
and high skill labor supply increases.
Labor Market Equilibrium
The labor market equilibrium determines the wage rate and employment. If the wage rate exceeds the
equilibrium wage rate, there is a surplus of labor and wage will fall. If the wage rate is less than the
equilibrium wage rate, there is a shortage of labor and wage will rise.

# Difference between demand pull and cost push inflation

BASIS FOR DEMAND-PULL INFLATION COST-PUSH INFLATION

COMPARISON
Meaning When the aggregate demand increases at a
faster rate than aggregate supply, it is known
as demand-pull inflation.
Represents How price inflation begins?
Caused by Monetary and real factors.
When there is an increase in the price
of inputs, resulting in decrease in the
supply of outputs. It is known as cost-
push inflation.
Why inflation is so difficult to stop,
once started?
Monopolistic groups of the society.
Policy Monetary and fiscal measures. Administrative control on price rise and
recommendation income policy.

# The relationship between the Marginal Propensity to Consume (MPC) and the Multiplier (K)
The Multiplier (K) is the ratio of a change in National Income to the change in government spending that
cause it. The mechanism that gives rise to a multiplier effect is that an initial incremental amount of
spending can lead to increase in consumption spending, increasing income further and hence further
increasing consumption and whiles The Marginal Propensity to Consume (MPC) is defined as the
proportion of the aggregate raise in pay that is utilized on the consumption of goods and services opposing
to the amount being saved. It can also be defined as Induced Consumption as this shows the consumption
of goods and services due to increase in disposable incomes.
The relationship between the Multiplier (K) and Marginal Propensity to Consume (MPC) is that, the
multiplier relies on the MPC (Marginal Propensity to Consume) in an open economy. So, if there is an
increase in the MPC it will eventually be an increase in the Multiplier and vice versa.
Some consumption maybe seen as more benevolent (to the economy) than others, Therefore, spending
could be targeted where it would do most benefit, thus generate the highest (close to 1) MPC.
Let assume consumption increases by eighty percent (80%) for each additional income of a worker in
Ghana. By which:
MPC = Change in Consumption (∆C)
Change in Income (∆Y)
= 0.8
1
= 0.8

#Consumption function, in economics, the relationship between consumer spending and the various
factors determining it. At the household or family level, these factors may include income, wealth,
expectations about the level and riskiness of future income or wealth, interest rates, age, education, and
family size. The consumption function is also influenced by the consumer’s preferences (e.g., patience, or
the willingness to delay gratification), by the consumer’s attitude toward risk, and by whether the
consumer wishes to leave a legacy).