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Running Header: Market Equilibration Process Paper

Labor Demand and Supply

Running Header: Market Equilibration Process Paper Introduction The purpose of this paper is to relate the concepts of the market equilibrating process to a prior real-world experience occurring in a free market. The market equilibrating process will be explained and the following components will be considered in the explanation; Law of demand

and the determinants of demand, law of supply and the determinants of supply, labor demand and supply. Law of Demand and the Determinants of Demand According to Economics: Principles, problems, and politics, a fundamental characteristic of demand is this: Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. In short, there is a negative or inverserelationship between price and quantity demanded. Economists call this inverse relationship the law of demand and the determinants are the other things equal in the relationshipbetween price and quantity demanded (McConnell, Brue and Flynn, 2009). Law of Supply and the Determinants of Supply According to Economics: Principles, problems, and politics, the law of supply states that asprice rises, the quantity supplied rises; as price falls, the quantity supplied falls and the basic determinants of supplyare, resource prices, technology, taxes and subsidies, prices of other goods, producer expectations, and the number of sellers in the market (McConnell, Brue and Flynn, 2009).

Running Header: Market Equilibration Process Paper Labor Demand and Supply The demand and supply of labor are determined in the labor market. The participants in the labor market are workers and companies. Workers supply labor to companys in exchange for wages as shown in a circular flow model. Companies demand labor from workers in exchange for wages. If the demand for the companys output increases, the company will demand more labor

and will hire more workers. If demand for the companys output falls, the company will demand less labor and will reduce its work force. Consider a perfectly competitive company that uses labor as an input. The company faces a market price of $10 for each unit of its output. The total product, marginal product, and marginal revenue product that the company receives from hiring 1 to 5 workers are reported in Table 1 TABLE 1 MARGINAL REVENUE PRODUCT OF LABOR Labor input (workers) 0 1 2 3 4 5 Total Product (number of goods) 0 9 17 22 25 26 Marginal product of labor 9 8 5 3 1 Marginal revenue product of labor $90 80 50 30 10

The marginal revenue product of each additional worker is found by multiplying the marginal product of each additional worker by the market price of $10. The marginal revenue product of

Running Header: Market Equilibration Process Paper labor is the additional revenue that the company earns from hiring an additional worker; it represents the wage that the company is willing to pay for each additional worker. The companys profit-maximizing labor-demand decision is depicted graphically in Figure 1.

Figure 1 This figure graphs the marginal revenue product of labor data from Table 1 along with the market wage rate of $50. When the marginal revenue product of labor is graphed, it represents the companys labor demand curve. The demand curve is downward sloping due to the law of diminishing returns; as more workers are hired, the marginal product of labor begins declining, causing the marginal revenue product of labor to fall as well. The intersection of the marginal revenue product curve with the market wage determines the number of workers that the firm hires, in this case 3 workers. In conclusion this paper has explained the market equilibration process and the components of law of demand and the determinants of demand, law of supply and the determinants of supply, labor demand and supply. It has also shown that the wage rate equals the marginal productivity of labor and that the supply labor depends upon the money wage rate.It is clear that the basic

Running Header: Market Equilibration Process Paper tools of supply and demand help immensely to understand and predict everyday events in our world today.

References CliffsNotes.com. Labor demand and supply in a perfectly competitive market. Retrieved April 18, 2011 from http://www.cliffsnotes.com/study_guide/topicArticleld-9789.aticleld9781.html McConnell, C.R., Bruce, S.L., & Flynn, S.M. (2009). Economics: Principles, problems, and policies (18th ed.). Boston, MA: McGraw-Hill Irwin.