Economics » Labour and Financial Markets » Demand and Supply at Work in Labor Markets

Key Concepts and Summary

Key Concepts and Summary

In the labor market, households are on the supply side of the market and firms are on the demand side. In the market for financial capital, households and firms can be on either side of the market: they are suppliers of financial capital when they save or make financial investments, and demanders of financial capital when they borrow or receive financial investments.

In the demand and supply analysis of labor markets, the price can be measured by the annual salary or hourly wage received. The quantity of labor can be measured in various ways, like number of workers or the number of hours worked.

Factors that can shift the demand curve for labor include: a change in the quantity demanded of the product that the labor produces; a change in the production process that uses more or less labor; and a change in government policy that affects the quantity of labor that firms wish to hire at a given wage. Demand can also increase or decrease (shift) in response to: workers’ level of education and training, technology, the number of companies, and availability and price of other inputs.

The main factors that can shift the supply curve for labor are: how desirable a job appears to workers relative to the alternatives, government policy that either restricts or encourages the quantity of workers trained for the job, the number of workers in the economy, and required education.


minimum wage

a price floor that makes it illegal for an employer to pay employees less than a certain hourly rate

Review Questions

  1. What is the “price” commonly called in the labor market?
  2. Are households demanders or suppliers in the goods market? Are firms demanders or suppliers in the goods market? What about the labor market and the financial market?
  3. Name some factors that can cause a shift in the demand curve in labor markets.
  4. Name some factors that can cause a shift in the supply curve in labor markets.

Critical Thinking Questions

  1. Other than the demand for labor, what would be another example of a “derived demand?”
  2. Suppose that a 5% increase in the minimum wage causes a 5% reduction in employment. How would this affect employers and how would it affect workers? In your opinion, would this be a good policy?
  3. What assumption is made for a minimum wage to be a nonbinding price floor? What assumption is made for a living wage price floor to be binding?


1. Identify each of the following as involving either demand or supply. Draw a circular flow diagram and label the flows A through F. (Some choices can be on both sides of the goods market.)

  1. Households in the labor market
  2. Firms in the goods market
  3. Firms in the financial market
  4. Households in the goods market
  5. Firms in the labor market
  6. Households in the financial market

2. Predict how each of the following events will raise or lower the equilibrium wage and quantity of coal miners in West Virginia. In each case, sketch a demand and supply diagram to illustrate your answer.

  1. The price of oil rises.
  2. New coal-mining equipment is invented that is cheap and requires few workers to run.
  3. Several major companies that do not mine coal open factories in West Virginia, offering a lot of well-paid jobs.
  4. Government imposes costly new regulations to make coal-mining a safer job.

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