Question

Draw a steep labor supply curve and a less steep labor demand curve on a set of axes. Now suppose demand decreases. Label the old and new equilibria. Draw a cobwebbing path to show how wages and quantities of labor evolved to get from the old equilibrium to the new equilibrium.

Answer 1

Answer

In the above figure, the quantity of labor is measured on the horizontal axis, and the price of labor, i.e., wage rate, is measured on the vertical axis. The 'S_L' is the labor supply curve, and 'D_L1' is the initial labor demand curve.The initial equilibrium wage rate is 'W₁' , and the initial equilibrium quantity of labor is 'L₁'. Thus the initial equilibrium point is 'N'.

When the demand for labor decreases, the demand curve for labor shifts leftward and the new demand curve for labor is 'D_L2'. The supply curve of labor remains unchanged. So the equilibrium wage rate decreases to 'W₂', and the equilibrium quantity of labor decreases to 'L₁'. The new equilibrium point is 'V'

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Cobweb path: The cobweb path in a market shows, how the equilibrium is reached in a market, which is in disequilibrium, i.e., either it is experiencing surplus or it is experiencing deficit. As the spiral path looks like a cobweb, so it is called cobweb path.

Now, in the given labor market, the initial equilibrium point is 'N'.If the demand for labor decreases, the labor demand curve will shift leftward.Then at the prevailing wage rate, W₁, there will emerge an excess supply of labor to the amount of 'TN'. So the wage rate will fall. Let the wage rate falls to W₃. At this wage rate, the demand for labor is greater than the supply of labor.So there emerges excess demand for labor.This will pressure the wage rate to rise. Now, if the wage rate rises above 'W₂', there will again emerge an excess supply in the labor market. Thus the wage rate will fall again. This movement of price will continue until the market gets clear at the new equilibrium wage rate 'W₂', at which the equilibrium quantity of labor is 'L₂'.

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