What this lesson teaches
I can find the equilibrium price and quantity where demand meets supply.
Syllabus 9570, 2.1.2(e). Demand and Supply Analysis and its Applications: The equilibrium market price and quantity are determined by the interaction of demand and supply
I can work out how shifts in demand or supply change price, quantity, spending, revenue, consumer surplus and producer surplus.
Syllabus 9570, 2.1.2(f). Demand and Supply Analysis and its Applications: Changes in demand and supply can affect equilibrium price and quantity, consumer expenditure, producer revenue, consumer surplus and producer surplus
Make a guess
In the market for nurses, who is on the demand side?
- Hospitals and clinics that hire.
- Trained nurses who are looking for work.
- Patients who need care.
Show the answer
Hospitals and clinics that hire.
In a labour market, employers demand labour and workers supply it. The wage is the price.
In a labour market, the wage is the price, employers demand labour and workers supply it.
Labour markets use the same tools. The price is the wage rate, and the quantity is the amount of labour employed.
Employers are on the demand side. Their demand for workers is a derived demand: it comes from demand for the goods and services workers help produce.
Workers are on the supply side. Supply depends on things like the number of trained people, working conditions and alternative jobs.
Singapore's ageing population raises demand for healthcare, and so raises the demand for nurses. With supply unchanged, wages and employment of nurses rise.
How much wages and jobs change depends on elasticity. The supply of labour is wage inelastic when a job needs years of training, as for nurses or pilots: a higher wage cannot quickly create more qualified workers, so a rise in demand mostly raises the wage. Supply is wage elastic for jobs that need little training, such as delivery riders, so employment rises and wages barely move.
The demand for labour is wage elastic when machines can easily replace workers, when wages are a large share of a firm's costs, or when customers would switch away if prices rose. Then a higher wage costs many jobs. If none of these holds, a higher wage costs few jobs.
Under Singapore's Progressive Wage Model, cleaners' wages have been set to rise in steps since 2015. Buildings still have to be cleaned, so the demand for cleaners is fairly wage inelastic, which helps explain why higher wages have not led to large job losses.
- Price of labour
- The wage rate.
- Derived demand
- Firms want workers because customers want the product.
- Supply of labour
- Comes from workers; inelastic when training takes years.
- Demand for labour
- Elastic when machines can replace workers or wages are a large share of costs.
What shifts labour demand and supply
Labour demand
Demand for the product, worker productivity, the cost of machines that could replace workers.
Labour supply
Number of trained people, wages in other jobs, working conditions, foreign worker policy.
Worked example: Demand for bicycle mechanics
More people start cycling to work, so bicycle shops get more repair jobs.
- Demand for repairs rises, so shops want more mechanics at every wage. This is derived demand.
- The demand for mechanics shifts right. At the old wage there is a shortage of mechanics.
- Wages rise, and more people are willing to work as mechanics, moving along the supply curve.
- New equilibrium: higher wage, more mechanics employed.
Watch out for this
Workers demand jobs, so workers form the demand curve.
In a labour market, workers supply labour. Employers are the ones who demand it.
Check your understanding
More trained dental assistants become available in Singapore. Employers' demand is unchanged. What happens?
- The wage falls and employment rises.
- The wage rises and employment rises.
- The wage and employment both fall.
Show the answer
The wage falls and employment rises.
Right. Labour supply shifts right, creating a surplus at the old wage, so the wage falls and more are hired.