Wage Determination (Edexcel IGCSE Economics)

Diagrammatic Analysis of the Labour Market

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

  • The DL is the demand by firms for workers

  • The SL 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

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 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

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

  • There is a rise in the equilibrium wage rate to W₂

  • There is a rise in the equilibrium quantity of graphic designers employed to Q₂

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

Diagram analysis

• A rise in the demand for AI programmers may cause a fall in the supply of graphic designers as they switch to different jobs

• The supply curve of labour will shift left

  • There is a rise in the equilibrium wage rate to W₂

  • There is a fall in the equilibrium quantity of graphic designers employed from Q₁ to Q₂