Factors Affecting Equilibrium Price and Quantity
Is the price elasticity of demand for gasoline more elastic over a shorter or a longer period of time?
The concept of price elasticity of demand is essential because it provides the manufacturers with basic knowledge of understanding the markets. Therefore, when the quantity of a product demanded by the customers indicates a considerable change regarding variations in its price, it is referred to as “elastic” (Kendall & Arellano, 2019). In contrast, some products are described as “inelastic,” which implies that their prices do not change in the presence of adjustments in supply and demand (Kendall & Arellano, 2019).
A real-life scenario of price elasticity of demand for gasoline is more adaptable in an extensive period than in impermanence. It is because this product is a necessity in transportation; therefore, the automobile largely depends on it. Furthermore, as technology advances, manufacturers will consider mass production of electric cars, but it is a process which will take a long time (Kendall & Arellano, 2019). As such, it suggests that the market necessity for gasoline is quick to respond to variations in prices over an extended duration.
Is the price elasticity of supply, in general, more elastic over a shorter or a longer period of time?
The theory of price elasticity of supply is also imperative in comprehending the marketplace. It is used to determine how the quantity of goods supplied is reliant on price changes (Kendall & Arellano, 2019). Therefore, sourcing of products is generally more price elastic in the long-run, provided that the producer is given more time to adjust its production capacity. For example, supply is likely to be price inelastic in the short-run since it is challenging for manufacturers to increase output and augment their utilization of production factors.
Shape of the Labor Supply Curve
Why is the supply curve for labor usually upward sloping?
The upward sloping of various labor supply curves is attributed to several reasons. In most cases, it acts as an incentive and motivation to prevent workers from looking for lucrative opportunities in other industries (Nizova & Sorokina, 2019). Laborers tend to shift their efforts to more profitable undertakings; therefore, it explains why the curve’s shape is usually slanting upwards (Nizova & Sorokina, 2019). In an organizational context, managers will have to offer higher wages to recruit new employees.
Factors that Shift Labor Demand Curves
In the graph below, assume that the market demand curve for labor is initially D1. The market supply curve for labor is indicated with figure “S.” Wage rate is depicted on the other things held constant vertical axis (dollars per unit), and employment level (quantity of labor) is depicted along the horizontal axis. Answer the following questions.
What are the initial equilibrium wage rate and employment level?
The initial equilibrium wage rate is represented by point “b.” Likewise, the initial labor corresponds with point “f.” Generally, if there is a reduction in the price of a substitute product, then it is followed by a corresponding decline in demand for labor provided that other constraints are held constant (Hubbard & O’Brien, 2018).
Other things held constant, assume that the price of a substitute resource decreases.
What will happen to the demand for labor? Will it increase or decrease?
The substitution effect accounts for the rising section of the labor supply curve. It is based on the concept that if wage increases, employees are readily available to work extra hours by foregoing their leisure time since the opportunity cost of spare time increases with rising wages.
What are the new equilibrium wage rate and employment level?
The new equilibrium wage rate is represented by point “c” whereas point “e” denotes the employment level. In essence, price increases of commodities are accompanied by a consequent rise in input. Conversely, when the value of the end product deteriorates, firms will consider labor as redundant.
Other things held constant, suppose that demand for the final product increases. Using the labor demand curve D1 as your starting point, what happens to the demand for labor?
What are the new equilibrium wage rate and employment level?
the labor curve will move upwards to D3 since the need for input will be significant. The new equilibrium wage rate is indicated at point “a” whereas point “g” represents the employment level.
Assume this industry is dominated by non-union workers. How would the equilibrium wage compare to that earned in a similar industry with similarly skilled union workers?
Unions play a vital role in improving the working conditions of the labor market. Therefore, these bodies raise the wages of organized workers by approximately 20% and increase reimbursement, including benefits, by an estimated 28% (Nizova & Sorokina, 2019). The most comprehensive benefit for them is the fringe compensation packages. They are more likely to get leave allowance than their non-unionized colleagues accompanied by health insurance and pension programs (Hubbard & O’Brien, 2018). Therefore, in regard to figure 1, the equilibrium wage of unionized employees will be higher than those of non-union laborers.
Calculating Total Revenue and Marginal Revenue Product
Use the following data to answer the questions below. Assume a perfectly competitive product market.
Calculating the total revenue product and marginal revenue product at each level of labor input if output sells for $4 per unit.
Total Revenue (TR) = Quantity(Q) x Price(P)
The marginal product of labor = (Change in quantity/change in labor)
Marginal revenue product = (Marginal product x marginal revenue)
If the wage rate is $15 per hour, how many units of labor will be hired? Explain your answer.
A wage rate of 15 United Stated dollars requires a corresponding labor input of 4.
References
Hubbard, R. G., & O’Brien, A. P. (2018). Microeconomics (7th ed.). Pearson.
Kendall, L. K., & Arellano, F. (2019). Incorporating price elasticity in financial forecasting models: From theory to practice and implementation. Journal of Education for Business, 94(4), 217–227. Web.
Nizova, L. M., & Sorokina, E. N. (2019). Problems of balancing supply and demand in the labor market of the Republic of Mari El. Studies on Russian economic development, 30(4), 462–466. Web.
