Page 46 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 3: Theories of Income, Output and Employment: Classical Theory

Notes
Figure 3.2
Y
S
Real w L
(w/p) Excess
supply
w 1

w E

w 2
Excess
demand
D
L
X
O L Qty of Lab.
f
Fig. 10.1
(c) Market Equilibrium: Equilibrium occurs where D and S curves intersect. Ow is the
L L
equilibrium real w and O the equilibrium quantity of labour. At real w, higher than Ow,
L
there will be excess supply. At real w below Ow, there will be excess demand. In both
situations, real w will adjust to reach Ow.
Shifts in D and S
L L

S can shift due to higher population growth, new immigrants, more women entering into
L
labour force, etc. This shifts S to the right. Real w falls.
L
D curve can shift, to the left, on account of fall in investment etc, and to the right, due to
L
technological progress, etc. Downward shift reduces real w and upward shift increases real w.
Figure 3.3
Y
S S
Real w L 1 L 2

w 1 E 1

E
w 2 2

D
L
O L L Qty of Lab. X
1 2
Fig. 10.2

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