Question

When new European Union member countries join the EU they become subject to the European Union competition law--a law that regulates anticompetitive behavior and keeps markets within Europe more competitive (meaning firms have less market power). Using an AS-AD framework, briefly discuss the effect of the competition law on a country's decision to become an EU member country. Your (brief) discussion should include effects on the labor market as well as prices and output. You may find a graph or two helpful in keeping track of these effects.

Answer 1

When a country becomes a member of European Union, then there are certain terms and conditions which needs to be signed related to movement of labor, anti-competitive behavious of firms in the industry. These cause changes in the labor market and AS-AD model of these countries. In the labor market and AD-AS model initial equilibrium occurs at point E1. Since there are no restrictions on the movement of labor once the country joins EU, it leads to increase in the labor supply in the economy which shifts the labor supply curve of the economy righwards to Ls' which leads to fall in wage rate and also leads to increase in the amount of labor employed in the labor market.

In the AD-AS diagram, tis will increase the level of competition in the market. As the competition increases, firms become more efficient and their overall cost of production decreases. This leads to rightward shift of the aggregate supply curve in the economy and AS shifts rightwards to AS' in the economy and new equilibrium occurs at point E2 where price level in the economy has decreased to OP2 and level of Real GDP has increased to OY2.

Thus, when a country becomes a member of EU, then it leads to fall in wages, increases employment in the economy and leads to fall in inflation rate and increase in the level of output produced in the economy.