Influences of the demand for labour and the supply of labour on wage determination

Microeconomic Decision‑Makers – Workers

1. The Demand for Labour

Think of the labour market like a dance floor. 👯‍♂️ The employer is looking for dancers (workers) to keep the music (production) going. The more dancers the employer wants, the higher the wage they must offer to attract them.

Mathematically, the demand for labour is represented by the Marginal Revenue Product of Labour (MRPL):

$MRPL = \frac{d(TR)}{dL}$

where TR is total revenue and L is labour input.

2. The Supply of Labour

Now imagine the dance floor again. The workers decide how many hours they want to dance. They compare the wage offered to the opportunity cost of their time. If the wage is high, more people will join; if low, fewer will.

The supply of labour is often shown as:

$S_L = f(W)$

where W is the wage rate.

3. Wage Determination: The Intersection

The equilibrium wage is where the demand curve (downward sloping) meets the supply curve (upward sloping). This is the point where the quantity of labour demanded equals the quantity supplied.

$MRPL = S_L$

4. Factors Shifting Demand & Supply

5. Real‑World Example

During a tech boom, the demand for software developers rises sharply. Employers offer higher wages to attract talent. Meanwhile, the supply of developers increases as more students choose computer science, but the wage still stays high because the demand outpaces the supply.

Exam Tips

6. Quick Quiz

1. What happens to the equilibrium wage if the demand for labour increases while supply remains unchanged?
2. Which factor would shift the supply curve to the left?
3. Draw a simple diagram showing a shift in the demand curve due to a rise in product price.