Chapter 2

Overview of the
Labour Market

© 2006 by Nelson, a division of Thomson Canada Limited. 1

In this chapter you will learn to:
1. Describe the concept of a market
2. Draw demand and supply curves
3. Explain shifts in demand and supply
4. Explain how the market reaches
equilibrium
5. Describe price responsiveness of supply
and demand
6. Calculate the coefficient of price elasticity

© 2006 by Nelson, a division of Thomson Canada Limited. 2

In this chapter you will learn to:
7. Discuss the factors that influence price
elasticity
8. Explain how labour markets differ from
other markets
9. Contrast the stock and flow approach
to labour markets
10. Explain the Circular Flow model
11. Discuss globalization in Canadian
labour markets
© 2006 by Nelson, a division of Thomson Canada Limited. 3
The Concept of a Market:
• The interaction of buyers and sellers
• In a labour market the price is the wage rate
• In product markets buyers demand goods
and services
• In product markets sellers supply goods and
services
• In labour markets employers demand
services
• In labour markets employees supply services
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The Demand Curve

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The Demand Curve:
• Demand for normal products and services
is downward sloping
• This indicates that a lower price means
consumers want more of the product and
vice versa

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Factors affecting Demand (Shifts):

• The price of related products or services

• Income levels of consumers
• Consumer expectations about future
prices and incomes
• Tastes and preferences
• The number of buyers

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Factors affecting Demand
• Changes in the price of the product or
service indicates a movement along the
demand curve, but does not shift the
curve.

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The Supply curve:

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The Supply Curve:
• The Supply curve for normal products and
services is upward sloping.
• This indicates that a higher price means
producers are willing to produce more of
the product and vice versa.

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Factors affecting Supply (Shifts):

• Production Costs
• Prices of related products or services
• Expected future prices
• The state of technology
• The number of suppliers
• Government regulations
• Weather conditions

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Factors affecting Supply:
• Changes in the price of the product or
service indicates a movement along the
supply curve, but does not shift the curve.

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Demand and Supply:

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Price Determination (Equilibrium):

• Prices are determined by the intersection

of demand and supply
• A shortage is when prices are below
equilibrium
• A surplus is when prices are above
equilibrium

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Price Elasticity of Demand
(Elasticity Coefficient):
• The responsiveness of quantity demanded
to a change in price
• If the percentage change in quantity
demanded is greater than the percentage
change in price = elastic
• If the percentage change in quantity
demanded is less than the percentage
change in price = inelastic
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Elasticity Coefficient:
• Holding all other variables constant:
• If Total Revenue increases as price
increases, demand is inelastic
• If Total Revenue decreases as price
increases, demand is elastic
• If Total Revenue stays constant as price
changes, demand is unitary elastic

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Price Elasticity of Supply:
• The responsiveness of quantity supplied to
a change in price
• The percentage change in quantity
supplied divided by the percentage
change in price

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Factors that influence Price
elasticity of demand:
• The number of substitutes
• Luxury versus necessity
• Percentage of Income spent on the
product or service

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Labour Market Differences:
• Labour services are inseparable from
people
• Employment relations last longer
• Workers and jobs are highly diverse
• Labour markets are highly fragmented

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Stocks and Flows:
• Stock variable: A variable whose quantity
is measured at a given point in time
• Flow variable: A variable whose quantity is
measured per unit of time
• Bathtub analogy: The level of the water is
the stock; the water from the faucet is the
flow

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Circular Flow Model:

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Circular Flow Model:
• A simple representation of the relationship
between firms and households
• Illustrates real and money flows
• Product markets and factor markets are
included
• Illustrates the equality of Income and
Output in an economy

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Globalization:
• The integration of countries through the
growth in foreign trade and foreign
investment
• Specialization and trade can make
everyone better off
• Reduction of trade barriers facilitates trade
• Differences in labour standards exist
internationally
© 2006 by Nelson, a division of Thomson Canada Limited. 23
Summary:
 Describe the concept of a market
 Draw demand and supply curves
 Explain shifts in demand and supply
 Explain how the market reaches
equilibrium
 Describe price responsiveness of supply
and demand
 Calculate the coefficient of price elasticity
© 2006 by Nelson, a division of Thomson Canada Limited. 24
Summary:
 Discuss the factors that influence price
elasticity
 Explain how labour markets differ from
other markets
 Contrast the stock and flow approach to
labour markets
 Explain the Circular Flow model
 Discuss globalization in Canadian labour
markets
© 2006 by Nelson, a division of Thomson Canada Limited. 25