Wage Determination (Edexcel IGCSE Economics)

Diagrammatic Analysis of the Labour Market

Spec point — 1.2.5e

• Labour market equilibrium occurs when the demand for labour (D_L) is equal to the supply of labour (S_L)

  • The D_L is the demand by firms for workers
  • The S_L is the supply of labour by workers

• Individual firms are price takers in the labour market as they have to accept the wage rate that workers are being paid in the industry

  • If they offer a lower wage, they will likely struggle to recruit workers
  • If they offer a higher wage, there will be an excess supply of workers applying to work there

In the labour market for graphic designers, the equilibrium wage rate is W and the equilibrium quantity is Q. At this point the DL = SL

Diagram analysis

• The market for graphic designers is in equilibrium, where D_L = S_L
• The equilibrium wage is W and the quantity of labour is Q
• There is **no excess supply of labour
• There is no excess demand** for labour

The Effect of a Rise in Demand for Labour

Spec point — 1.2.5e

The Effect of a Rise in the Demand for Labour

• A rise in the demand for labour will shift the demand curve for labour to the right
• This causes an increase in the equilibrium wage rate and the quantity of labour employed

A rise in the demand for labour increases the price of labour

Diagram analysis

• A rise in the demand for websites will cause a rise in the demand for graphic designers (derived demand)

• The demand curve for labour will shift right from DL₁to DL₂

  • There is a rise in the equilibrium wage rate to P₂
  • There is a rise in the equilibrium quantity of labour employed to Q₂

The Effect of a Fall in Supply of Labour

Spec point — 1.2.5e

The Effect of a Fall in the Supply of Labour

• A fall in the supply of labour will shift the supply curve of labour to the left
• This causes an increase in the equilibrium wage rate and a fall in quantity of labour employed

A fall in the supply of graphic designers will cause the wage to rise to W2 and the quantity of graphic designers employed to fall to Q2

Diagram analysis

• A fall in the supply of graphic designers as they switch to different jobs will impact the labour in the graphic design industry

• The supply curve of labour will shift left

  • There is a rise in the equilibrium wage rate to W₁
  • There is a fall in the equilibrium quantity of graphic designers employed from Q to Q₁