Principles of economics openstax chapter4

College
Principles
ofPhysics
Economics
Chapter
TitleMarkets
ChapterChapter
4 Labor #and
Financial
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Labor market for nurses

Product Market Participants:

•
•

Households on the demand side
Business firms in the supply side

Labor Market Participants:

•
•

Households on the supply side
Business firms in the demand side

The Labor Market

Supply of labor: the hours of labor
services workers want to provide at various
wages.

Demand for labor: the labor of labor
services firms want to hire at various
wages.

W0 = equilibrium wage
L0 = equilibrium employment


Market for labor resources

In the labor market, there is a growing demand for nursing professionals. Nursing jobs are expected to grow
26% in 2010-2020. The average annual salary of $64,490 in 2010 is also going to rise.


Labor market for nurses

•

With the demand for nurses intersecting the supply of nurses, 35,000 nurses are hired, each at
$70,000 a year.

•

At a salary of $75,000, 38,000 are available for work. But, only 33,000 have jobs. So, there is

an excess supply or surplus of 5,000 nurses.

•

At a salary of $60,000, 27,000 are available for work. But, 40,000 nurses are needed. So, there
is an excess demand or shortage of 13,000 nurses.


Labor market for nurses


Factors causing demand to increase

•

Education and Training - Nurses become more productive and make higher salaries

•

Technological Advancement – New methods and equipment complementing nursing skills to do jobs
safer, faster, and better

•

Government Regulations – Regulations making it necessary for nurses to take more responsibility and
perform a larger variety of tasks.

•

Price and Availability of other Inputs – When medical technology becomes available and affordable to use

in hospitals and doctors’ offices.


Labor market response
In 2010, the median salary for nurses was $64,690. As demand for nursing services increases, more
nurses are employed at higher salaries.

Now, assume a larger salary motivates some nurses to retire early (ceteris paribus). As a result, the
supply of nurses decline. This market response will result in even higher salaries for nurses, but an
uncertain outcome in the number of nurses employed.

More nurses are employed if the demand increase is larger than the supply decrease.


Labor market response


Labor Market response


Effects technological change

Figure (a): The demand for low-skill labor declines when machines can do the job
previously done by these workers. Labor and machines are substitutes.

Figure (b): New technology can also increase the demand for high-skill labor in fields
such as information technology and network administration. Labor and machines are
complementary.

Shift in demand for labor


Effects of Minimum wage

Equilibrium: Wage = $10/hour and Employment = 1,200
Minimum Wage = $12/hour leads to a surplus of labor
Quantity Supplied = 1,600
Quantity Demanded = 700
Unemployment = 1,600 – 700 = 900


Market for financial capital

•

With the demand for loanable funds intersecting the supply of loanable funds at interest rate of
15%, $600 billion are borrowed/lent.

•

At an interest rate of 21%, $750 billion are available for lending. But, only $480 billion are
borrowed. So, there is an excess supply or surplus of $270 billion.

•

At an interest rate of 13%, $510 billion are available for lending. But, $700 billion are needed to
borrow. So, there is an excess demand or shortage of $190 billion.

Market for financial capital


Market for financial capital

Demand: Amount of money wanted to borrow
Supply: Amount of money available to lend
Demand = Supply at E0
Equilibrium Rate of Return = R0
Equilibrium Financial Capital = Q 0


Factors causing supply to decrease

•

Poor economic conditions: prolonged recession, rapid inflation

•

Uncertainty about rising federal deficit and accumulating national debt

•

Diminished optimism about future financial conditions

•

Corruption and socio-political instability

Shift in supply of capital

A decline in the supply of loanable funds, causes the interest rate to rise and amount of funds
borrowed/lent to fall.


Interest rate regulation

Imposing a ceiling on the interest rate at R c < R0, will cause an excess demand or shortage of
financial capital.