Question

1. Given below are the demand schedule and supply schedule for the labour market for supervisors. Remember that demand for labour represents the employers’ demand for workers, while supply represents the workers’ willingness to work. Graph the demand and supply curve on one graph and determine equilibrium in this market. STATE the equilibrium. Label the graph properly. ( a properly labeled and accurate graph, one for clearly identifying and stating equilibrium –both price and quantity)

Please state the wage and quantity that establishes equilibrium pointing it.

Daily Wage for Supervisors	Quantity Demanded (000s)	Quantity Supplied (000s)
$200	560,000	40,000
$225	475,000	65,000
$230	375,000	100,000
$270	300,000	125,000
$300	295,000	295,000
$325	200,000	350,000
$340	100,000	465,000
$365	61,000	575,000

2. Calculate the coefficient of price elasticity of demand if the daily wage goes from $230 to $270. Is elasticity at this level inelastic or elastic? How do you know? calculate to 4 decimal places.
3. Based on the elasticity you calculated in Question 2, would it be a good idea for a union to try to negotiate a large wage increase? How successful do you think a union will be?

Answer 1

Equilibrium in the labor market is at the point where the quantity demanded of labor is equal to the quantity supplied of labor, and the respective wage rate is the equilibrium price.

That is,

Quantity of labor demanded = Quantity of labor supplied

Qd = Qs

As we can see that the quantity demanded of supervisor is equal to the quantity supplied of supervisor at wage of $300.

That is,

At wage rate $300

Quantity supplied = 295000

Quantity demanded = 295000

Therefore, Qs = Qd

Therefore the equilibrium price is $300, and equilibrium quantity of supervisors is 295000

Graphical representation:

Description of the diagram:

Here the blue line represents the demand curve and the red the supply curve. Point E is the equilbiurm point where the quantity of supervisors is 295000 and wage is $300. Q* and W* shows the equilibrium wage and quantity.

Price elasticity of demand of supervisor between wage rate $230 and $270.

Price elasticity of supervisor demand is the responsiveness of the firms to change quatity of supervisor demand for the change in the wage rate.

Therefore

or

Percentage change in wages:

Now percentage change in quantity of supervisor demanded:

Percentage change in wages:

Therefore putting the values of percentage change in quantity of supervisor demanded and wages into the formula of price elasticity of demand.

Therefore Price elasticity of demand for supervisor is -1.1500

As the price elasticity of demand is higher than one. It means that the demand for supervisor is elastic. That is a slight increase in the wage would make lead to more than a proportionally decrease in quantity of labor demanded.

Based on the elasticity of demand, I don't think it would be a good idea for unions to try to negotiate for a large wage increase. Since the wage elasticity of demand is elastic. It means that firms are more responsive to the change wage rate, if unions would demand a higher wage rate, the quantity of supervisor employed will decrease drastically. And that would make the increase in wages useless. So it is not in favor of the unions to demand a higher wage increase.